There’s a silver lining to higher interest rates: putting money aside eventually pays off.
Soaring inflation, which prompted the Federal Reserve to raise its benchmark rate, is finally having an effect on the return savers can get on their money.
Although the Fed has no direct influence on deposit rates, they tend to be correlated with changes in the target federal funds rate. As a result, savings account rates at some of the largest retail banks have been barely above the floor since the start of the Covid pandemic crisis – currently just 0.08%, on average.
With interest rates rising, “things are starting to pick up speed,” said Ken Tumin, founder of DepositAccounts.com.
Last month, the average rate for online savings accounts posted its biggest monthly increase since 2017, according to its analysis.
Online-only banks such as Goldman Sachs’ Marcus and Ally Bank offer higher returns, in part thanks to lower overhead costs than traditional banks.
At Marcus, the average rate for online savings accounts is currently around 1%, more than 12 times the rate at a traditional bank.
“If your dollars don’t stretch that far, now is a great time to take a step back and look at your financial situation and be a little more strategic,” said Liz Ewing, Marcus’ chief financial officer.
As the U.S. central bank continues its rate-hike cycle, those yields will also continue to rise, she added. “When the Fed acts, it will mean changes to the rates of banking products used by customers,” she said. “It seems like a no-brainer.”
Historically, an old-fashioned certificate of deposit was another way to guarantee a slightly better return.
Currently, 1-year CDs average 1.5% and high-yield CD rates pay over 2%, even better than a high-yield savings account.
CDs that offer the highest yields generally have higher minimum deposit requirements and require longer periods to maturity.
However, since the rate of inflation is now higher than all of these rates, any money saved loses purchasing power over time.
Rather than locking funds below the rate of inflation, “the best deal right now is [series] I Bonds,” Tumin said of finding an inflation-protected return.
These assets are federally guaranteed, making them nearly risk-free, and pay an annual rate of 9.62% through October, the highest yield on record.
While there are purchase limits and you can’t mine the money for at least a year, you’ll get a much better return than a one-year savings account or CD.
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