Yesterday, the Federal Reserve raised short term interest rates by a quarter of a percentage point, and Fed Chair Jerome Powell signaled that there would be another six increases this year with three to follow next year, for a total of 10. The goal is to start to tamp down on inflation which, at a 40-year high, is something 93% of consumers say they are already feeling, battling higher prices on everything from gas to groceries — especially gas and groceries. (If you missed our rundown on the new way to buy groceries to save money during this inflationary year, check it out before the next time you shop.)
But as we worry about ways to save money on all our essentials, we’re also thinking about ways to earn as much as we can on the money we’re saving. Unfortunately, banks — especially big ones — are flush with deposits right now, which doesn’t give them much reason to try to lure consumers with higher rates. So, where should we be putting our money right now so it stands the best chance for growth?
First, Understand What You’re Looking For
Are you a saver looking primarily for stability, or are you seeking more earning potential, and are you okay with some risk thrown into the equation?
“If you’re looking for growth, that’s an entirely different objective than why you have a savings account. A savings account is for safety and liquidity for money that could be needed at a moment’s notice,” says Greg McBride, Chief Financial Analyst at Bankrate. “Growing your investment at a time of inflation will necessitate taking risk, and is suitable for longer time horizons, money you won’t need for at least 5-10 years. A broad stock market index fund would be a good example.”
Think Small, and Start Your Search Online
If you’re looking for a little earnings on your savings, know that with the interest rate increase, “the arms race among the banks with the top-yielding savings accounts will truly get underway,” McBride says. “Most banks, and particularly larger banks, are already sitting on a surplus of deposits and will be very stingy about passing along higher returns to savers. But the online banks already paying competitive yields are fertile ground for higher rates being passed along to savers.”
History has shown that online savings accounts have done much better than brick-and-mortar savings accounts at keeping up with Fed rate hikes, explains Ken Tumin, founder of DepositAccounts.com. Tumin pointed to the period from December 2017 until December 2018 when the Fed hiked rates five times. During that period, the nationwide savings account APY (average percentage yield) for brick-and-mortar banks rose from 0.06% to 0.09%, while the online savings account rate increased from 1.29% to 2.21% — a huge difference.
As of March 1st, the online savings account average APY is 0.49%, but for brick-and-mortar banks, it’s just 0.06%. And if you’ve been following the numbers over the last year, you know that even the online savings account average APY hasn’t been great this last year — it reached a bottom of 0.45% in 2021. “But it has slowly started to rise in the last four months. A few online banks began increasing their online savings account rates just recently. The current high APY for an online savings account is 0.75%, at Comenity Direct,” Tumin says.
As you’re doing your research, take a look at this list of top-yielding, nationally available accounts via Bankrate. (They keep the list continuously updated.) This is the group where you’re likely to see the improvement in savings yields first.
The Bad News + An Alternative
Don’t get your hopes up that online savings account rates will go sky-high — they are unlikely to keep up with current inflation, Tumin says. “For money that shouldn’t be subject to principal risk (i.e., for emergency funds or short-term goals), the Series I Savings Bond [known commonly as the “I-Bond’] can be used to supplement an online savings account. I-Bonds will keep up with inflation and are guaranteed not to have negative yield even with deflation,” he explains. Due to the I-Bond’s purchase limits (you can only purchase $10,000 a year outright) and 1-year redemption restriction, they can’t replace an online savings account, but they can be used to supplement your savings account, he suggests.
Don’t Forget Credit Cards, Home Loans, and Student Loans
If you’re looking to understand other financial changes the Fed’s rate hike may bring about, keep an eye on credit cards — variable credit card interest rates will start to rise pretty much in lock-step with the Fed’s moves (the average now is 16.44%). Adjustable rate mortgages and HELOCs will also move higher as the Fed does (you’ll see these increases when your rate adjusts). Fixed mortgage rates are already trending higher (the average 30-year fixed-rate home mortgage is now above 4%, according to LendingTree) and these rates are expected to continue to move higher over time. You don’t have to worry about federal student loans — yet. Interest rates are staying at 0 until May, and a new rate will be set in July. Private student loan rates (on existing loans with variable rates and new loans) will start to rise.
And if you’ve been considering a refi, make your move. The rates aren’t going to get any lower anytime soon. If your credit is good (or good enough) to refi any of your debts (private student loans, federal student loans where you are super sure that you aren’t going to use any of the income-based repayment options, car loans, mortgages) at a cheaper rate, the time is now.