The Fed has just raised interest rates again. Make sure your savings are in the right place
The Federal Reserve comes increased its target federal funds rate at 2.25-2.50%. As rate hikes continue, experts say now is the time to make sure your money is in the right place to meet your savings goals, especially in a time of inflationary pressure and growing uncertainty.
This week’s increase marks the fourth interest rate hike this year as the Fed struggles to temper runaway inflation rates, and a three-quarters percent jump from the rate hike in last month’s interest. Coming from pandemic-era near-zero lows, the Fed’s latest move represents a total of 2.25% increase since the beginning of this year.
And there are likely higher rates to come – in a statement, the Fed said it “expects that continued increases in the target range will be appropriate” to achieve its goals of lower inflation and maximum employment.
As higher interest rates make mortgages, credit card payments and loan debt more expensive for homebuyers and borrowers, they also increase incomes for savers. Currently, the best high yield savings account rates approach 2% APY and the best certificates of deposit earn over 3% APY.
Here’s what else you need to know about this week’s interest rate hike, and why experts say now is the time to choose a bank that can better help you meet your financial goals:
How will higher federal interest rates affect your savings?
When the Federal Reserve changes its target federal funds rate, the interest rates that banks charge borrowers and pay on deposits tend to follow.
The target federal funds rate affects interest rate markets, the Fed’s plan to target inflation and market expectations for interest rates and inflation, according to Amy Rosenow, CFA, CFP and founder of Fearless Financial.
The change is not immediate, however, especially for savings. “Fed rate increases will generally correlate with banks’ APY increases very quickly in terms of increasing borrowing rates, and possibly, but usually more slowly, consumer savings rates,” Rosenow said.
You may have noticed that the APY of your savings account has increased steadily over the past few months, and not just in short bursts when the Fed raises rates. Similarly, you are unlikely to see a full percentage increase in direct response to this rate hike. Still, you can expect the rates on your savings accounts, CDs, and money market accounts to keep rising, at least as long as federal rates keep climbing.
“As long as the Fed raises interest rates, we can expect bank account APYs to continue to rise and become more attractive to savers,” says Jose Sanchez, CFPa financial planner based in New Mexico.
Why choosing the right shore is important
If you’re looking for the best return on your savings, be sure to find the best place for your money.
“Where you have your money is going to be very important [over] the next two years,” Greg McBride, CFA, chief financial analyst at Bankrate, told NextAdvisor earlier this year. Like NextAdvisor, Bankrate is owned by Red Ventures.
Rosenow agrees — she advises clients to keep a close eye on savings rates to find the best fit for their goals, as some banks offer more competitive rates than others.
“This year I’ve noticed that predominantly online savings banks have increased their rates and are now earning over 1.2%. Even money market rates from brokerage firms like Fidelity and Schwab have become more competitive Meanwhile, the big national banks have been “stingy” with their savings rate increases, she said.
These big brick-and-mortar chains are more likely to offer very low-interest traditional savings accounts – sometimes as low as 0.01%, even in today’s rising rate environment. To get the best interest rates, look for online banks or credit unions that offer high-yield savings account options. These banks have lower overhead and are more competitive, which translates into higher APYs for customers.
While the average national savings interest rate – which includes traditional non-high yielding savings account options – is still only 0.10% APY, there are many accounts that earn more than 10 times that amount.
In recent months, for example, Ally Bank has raised the interest rate on its savings account from around 0.50% to 1.25% APY. Synchrony Bank is also one of the highest savings account options today with an APY of 1.65%, up from 0.50% in March.
Why You Should Save in a Rising Rate Environment
Inflation is one of the biggest challenges facing American consumers today, and the Federal Reserve’s interest rate hikes are designed to slow the rate of runaway inflation.
The last consumer price index – which the government uses to track trends in the cost of gas, food, etc. – showed a 9.1% increase in the cost of goods and services over the past 12 months. But even savings rates above 2% or 3% APY will not help protect your purchasing power against inflation levels of 9% or more.
It’s always important to maintain a solid emergency fund — worth at least three to six months’ worth of expenses — and to save for short-term goals, like a down payment or going back to school.
Even a smaller amount of emergency savings can make a big difference in an emergency, says Michele Ranerivice president of financial services research and consulting at TransUnion.
Every little bit counts, Rosenow agrees. “Better to save a few dollars than nothing at all. Progress beats perfection.
Keep investing for maximum long-term returns
But for longer-term goals, remember that you’ll get better returns from an investment fund like your 401(k), a Roth IRA, or a general brokerage account that holds an index or mutual funds. placement.
“The majority of Americans can benefit from additional savings, whether it’s looking at Series I savings bonds, or better interest rates for your emergency fund, or buying the stock market after it’s been sold – if you can find a way to do that, now’s the perfect time,” says Rosenow.
Regardless of current market conditions, you should always have a plan, Sanchez says. You can rebalance your portfolio as your goals change, but having a plan for your money can help prepare you for interest rate and market fluctuations as they arise.
“From a long-term perspective, consistency is the key to investing over a multi-year horizon,” Raneri says. “A long-term financial strategy is to keep saving and investing, even when markets are falling.”