Your cash savings can get a higher return, but only at certain banks
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Banks are starting to pay a higher return on your money – good news for savers who have watched their stocks languish due to a horrific combination of low interest rates and high inflation.
However, some banks are moving faster than others. Some, especially traditional brick-and-mortar stores, may not move for a while.
At least 10 banks have raised interest rates on their high-yield savings accounts or money market deposit accounts since mid-April, according to data compiled by Bankrate.
They include: American Express National Bank, Barclays Bank, Capital One, CIT Bank, Colorado Federal Savings Bank, Discover Bank, Luana Savings Bank, Marcus by Goldman Sachs, Sallie Mae Bank and TAB Bank, according to Bankrate. A handful of others boosted yields earlier in 2022.
Rates are still relatively low — none still pays more than 1%. Most are between about 0.5% and 0.80%, according to data from Bankrate.
But the highest-paying accounts pay about 10 times more than the national average, which is 0.06%, according to Greg McBride, chief financial analyst at Bankrate.
And consumer yields are likely to climb steadily as the Federal Reserve continues to raise its benchmark interest rate to curb inflation. The central bank lowered this rate to low levels at the start of the Covid-19 pandemic to help support the economy.
“If the Fed ends up being as aggressive as it should be, the best-performing savings accounts could pull off 2% later this year,” McBride said.
“It’s the only place in the world of finance where you get the free lunch of higher return without higher risk,” he added. “It’s pure gravy.”
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Financial advisors often recommend that savers place their emergency funds in these types of accounts. The funds are safe (the deposits are insured by the Federal Deposit Insurance Corporation) and liquid (they are accessible at all times).
Savers should aim to have several months of household expenses on hand, in case of job loss or other unforeseen event.
Financial adviser Winnie Sun, co-founder of Sun Group Wealth Partners in Irvine, Calif., recommends saving at least six months on crucial living expenses (housing, food and medicine costs), plus an additional three months for each child in the household.
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Consumers also do not need to move all their funds. They can continue to manage their day-to-day finances (their checking accounts, for example) at their current bank to avoid the hassle of switching, and open an account at a new bank just for emergency funds, McBride said.
Not all banks are increasing their payments or doing so at the same pace.
Largely, those who have raised their account rates (some have done so multiple times in 2022) are online banks or the online banking divisions of traditional banks.
They have lower overhead and can use the lure of higher rates to compete with brick-and-mortar stores, which hold the lion’s share of customer deposits and are “in no rush” to increase payments, McBride said.
When the Federal Reserve raises its benchmark interest rate — known as the federal funds rate — it increases the cost of borrowing. Loans are becoming more expensive for consumers and businesses.
Banks earn money from loan interest. As the Federal Reserve raises its benchmark rate, banks derive more revenue from interest payments on higher loans and therefore may find themselves in a better position to pay a higher return on customer savings.
The central bank raised its key rate by half a percentage point on Wednesday, the biggest increase in more than two decades.
However, this seesaw effect will not necessarily be true for all institutions, due to another factor. Banks use deposits to lend money to other customers. But customers flooded the US banking system with cash to an unprecedented degree in the early months of the pandemic, in part due to cash hoarding and the flow of government payments like stimulus checks.
As a result, most banks may not see the need to pay higher savings rates to attract deposits and fuel their lending machine.
Even though a handful of banks are increasing their payouts, consumers are still struggling to keep pace with inflation.
The consumer price index, a key gauge of inflation, jumped 8.5% in March 2022 from a year earlier, the fastest 12-month increase since December 1981. As a result , money loses its value at a high rate.
“Overall, you’re still well below inflation levels,” Sun, a member of CNBC’s advisory board, said of high-yield savings account rates.
However, she added: “Sometimes we have to be comfortable receiving less return for less. [worry].”
Savers can opt for different approaches to emergency savings, depending on their household situation, Sun said.
For example, people who don’t want to open a separate high-yield savings account at another bank may be able to replicate those returns in an emergency cash account by investing 5% to 10% (depending on their appetite for risk) in a simple balanced fund sharing. between stocks and bonds, she says.
This investment is however subject to market risk. In an emergency, savers would leverage money (not invested assets) as much as possible.
People who don’t have the financial capacity to fund both an emergency savings account and a retirement account can also consider a Roth Individual Retirement Account, Sun said. In an emergency, investors can tap into their Roth IRA contributions as a last resort. (This does not incur a tax penalty, although withdrawing investment income may in some cases, such as withdrawing before age 59½. Roth IRAs also have annual contribution limits.)