Are you sitting on a sizeable amount of cash in a checking or traditional savings account? This is the perfect time to get that money to work harder for you, without the risks inherent in investing in the stock market or mutual funds.
Over the past several months you have likely heard about the Federal Reserve increasing the federal funds rate. In fact, in 2022 the Fed issued seven consecutive federal funds rate increases to combat inflation. Between March and December, the federal funds rate increased from 0.25% to 4.25%. Increasing the federal fund rate typically causes interest rates on credit cards, mortgages and auto loans to rise. This higher cost of borrowing decreases the overall demand for goods and services and, in turn, slows the inflationary pressure on prices. Though this year’s skyrocketing interest rates might be a difficult pill to swallow for consumers seeking home improvement loans or auto loans, there is a positive aspect. With rising federal funds rates comes an increase in savings interest rates.
There are two main vehicles for getting in on these higher interest rates: Certificates of Deposit (CD’s) and high-yield savings accounts.
CDs are a type of savings vehicle that pay a guaranteed interest rate on a fixed sum of money for a set period of time. Interest rates on CDs are at their highest point in 25 years. In January 2022, the national average one-year CD rate was under 0.2 percent APY. Today, many CDs are offering a guaranteed return of 4% or more. If you have $10,000 in a savings account earning less than 1% interest now, you could have almost $400 more after 12 months. One of the few downsides of a CD is that your money is tied up for whatever the term of the CD is (typically 6 months, 1 or 5 years), but the advantage is that the interest rate is locked in for that same period.
If you need more flexibility with your savings than a CD, consider a high-yield savings account. From 2018 and 2021, national average savings account interest rates fluctuated between 0.01% to 0.10%, making savings a guaranteed financial loss. In 2021, account interest rates hovered between 0.06% and 0.07%. As of February 2023, due to the Fed hiking interest rates, the savings account interest rate has risen to an average of 0.35% APY. And if you consider on-line banks, which typically have lower operating costs and thus can pay higher interest rates than brick & mortar banks, you can easily find banks offering 3.00% APY or above. If your bank is still only offering 0.01% APY on savings, you are missing out on significant interest earnings. If you have $2,500 in savings at a national bank offering 0.01% APY, you would only earn $0.25 in interest during the first year. Compare that to an online account paying 3.00%, which would net you $75 in interest earnings during the first year.
Contact our office to discuss more about if either or both of these choices would be right for you and your financial goals.
The rates quoted are subject to change. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan.