What rising interest rates mean for your savings accounts

Interest rates on the rise

With interest rates on the move, due to the latest rate hike, there are winners and losers galore. One area we haven’t paid much attention to for years is our savings accounts. For most of us, we have been forced into submission, simply accepting the laughable interest we have aroused. If you’ve been with a traditional bank, the savings interest rate has been, well, insulting. Some banks paid as little as 0.1% on some of their savings accounts.

How your savings account may change

What has changed is that with the Fed’s announcement of a 0.25% rate hike, banks will have to adapt to keep up. Of course, loan rates will also increase, but the big winner here is your cash savings rate. When the Fed raises rates, the banks are in concert raising what they pay to park money in their bank, generally speaking.

Essentially, this is exactly the outcome the Fed is hoping for to stifle inflation. More incentive to leave your money in the banks and less to withdraw it and spend it on the open market.

Now, if you have your typical 3-6 months (or more) in cash, those dollars can be a real amount. Ideally, you want to maximize the return on that investment. Sure, you can let it gain 0.01%, but why? Wouldn’t you rather capitalize on earning more? Above all, if inflation continues at its current rate of 7%, each dollar that does not earn anything REALLY loses 7% in purchasing power. It’s unlikely you’ll ever have a savings account that keeps up with inflation per se. However, if we can be smart with those dollars, we can at least reduce the effects of inflation on our purchasing power.

What can you do?

For starters, don’t just accept the interest rate provided to you by your regular bank. They are good at many things, usually although savings accounts are not one of them. Instead, start looking only at banks or online savings accounts. Without a physical location, these banks save on overhead, which is usually one of the reasons why their interest rates seem too good to be true.

Can you trust these banks?

An online bank may seem scary to some, so can they be trusted? The answer is – absolutely, yes. They are FDIC insured in the same way as your deposits at a more traditional bank (up to $250,000 per account registration). Additionally, most people already use online banking, even at their physical banks, so any security concerns would be the same no matter what type of bank you leave your money at.

How do they work?

Generally, the operation of these online banks is to create an online account. From there, you will connect it to your external current account. They will then make a small deposit of a penny or two to confirm the connection. From there, it’s as easy as apple pie. You can simply initiate a funds transfer to and from your accounts as you wish. There are some things you need to know when using an online-only bank to save:

1. Transfer time may take a day or two longer than an internal transfer you are used to.

2. There is usually a limit to the transfer amount per month. This is usually not a problem, but something to note.

3. Some banks will give you an interest rate, so beware. They can offer a lower rate for a set period of time and then change the rate.

Just be sure to read the fine print when choosing an online-only savings account.

A dollar saved is a dollar earned.

As Ben Franklin said, “a penny saved is a penny earned”. In some cases, the additional income is not revolutionary and in others it can be considerable. The point is things are changing and accepting the status quo should not be acceptable.

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