Making sure your money is working hard for you is an important skill to have if you want to have a sound financial situation. While it might be easier to keep all of your money in the same accounts no matter what (“set it and forget it”), a policy like that could cause you to potentially miss out on hundreds if not thousands of dollars. With interest rates going up, you may want to take a look at where your money is stored and make sure you’re getting the best deal possible.
Why are savings account interest rates up?
Savings rates vary for a variety of reasons, but many banks tie the interest rates they charge on loans and the interest rates they pay on savings accounts to the Fed Funds Rate, which is controlled by the U.S. Federal Reserve. With the Fed Funds Rate going up, that is causing many banks to raise the interest rate that they pay on savings accounts as well. The target for the Federal Funds Rate has gone up by 3% since the beginning of the year.
What’s the best savings rate?
Savings rates at different banks and financial institutions change all the time. In addition to being updated when the Federal Reserve updates the Fed Funds Rate, banks may update their savings rates at any time for promotions or other reasons. Mint keeps track of savings account rates, so make sure to check that out to see what types of rates are available to you. In October 2022, it’s not uncommon to see savings accounts paying 2%-3% or even more.
What to do with your money now
It’s important to understand how raising interest rates affect you and where you should put your money. If you have your money in a checking or savings account with an interest rate near zero, you might want to consider opening a new account with a higher interest rate. You may even be able to get a welcome bonus from opening a new bank account.
Here are a few other ideas of what you might consider doing with your money:
Pay down debt
If you have any high-interest consumer debt, paying down may be the best financial move for you. While it makes sense to keep some money in an emergency fund, it may not make sense to put money in a savings account earning 3% while you’re paying 20% on a credit card balance. Instead, it may make sense to channel some of your extra money into paying off your debt.
Open a Certificate of Deposit (CD)
Just like savings accounts, rates on certificates of deposit (CDs) are up since the beginning of the year. The downside of a CD is that you can’t access your money without penalty until the term ends. If you’re not sure what interest rates might be months or years down the road, you might want to be cautious about putting too much money into CDs. Still, they can make a lot of sense in the right situation.
Consider Series I Bonds
Another option to consider might be Series I Bonds, offered by the US Department of the Treasury. I Bonds are a type of savings bond that can help protect you from inflation. When purchasing an I Bond, you earn a fixed rate as well as a rate that varies with inflation. Twice a year, the Treasury Department sets the inflation rate for the next six months. Currently, the interest rate is 9.62% for I bonds issued between May 1, 2022 and October 31, 2022.
You can buy up to $10,000 per year in electronic I bonds per person, and you can also get up to $5,000 in paper bonds as part of your tax return. You can also gift bonds or purchase additional I bonds for your children. Buying bonds can be a good way to diversify your holdings, but you need to purchase before October 28th to ensure that your bond earns the 9.62% interest rate. Otherwise, you’ll earn whatever the rate is for the next six months, which will be announced in November 2022. One important note with I bonds is that you need to hold your money in the bond for at least 12 months, and you’ll lose 3 months of interest if you cash out before 5 years is up.
The Bottom Line
With interest rates rising, it’s important to constantly evaluate where you are keeping any extra money that you have. If you still have any significant amount of savings in an account earning a near-zero interest rate, you might want to shop around and find a better place to keep your money. Paying down debt, buying a CD or buying Series I bonds all may better options for you — so explore your options, get informed and make the best decision for your unique financial situation.