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Your Money Adviser
The Fed will probably begin raising interest rates in March, but rates paid to depositors are likely to rise at a slower pace. Here are some of your options.
Interest rates are likely to begin rising this year, and that should be good news for savers — right?
Probably not right away. The Federal Reserve is expected to begin increasing borrowing costs in March and, perhaps, several more times this year. But deposit rates paid to savers will probably rise at a much slower pace, analysts say. So you shouldn’t expect to see significantly higher rates on your emergency savings stash anytime soon.
That’s because big banks are flush with cash and don’t need to raise rates quickly to attract more deposits, said Greg McBride, chief financial analyst at the financial website Bankrate. “It will be a long haul.”
That means there will continue to be a gap for a while between the rates that banks pay to depositors and inflation, which has spiked in recent months largely because of the pandemic.
“This is the year that gap begins to narrow,” Mr. McBride said. “But you have to have your money in the right place.”
Still, even the best rates are not that great. But some savers may prefer keeping their money in a safe place, given the recent volatility in the stock market. What follows are some of the options.
Mr. McBride said smaller banks and online banks were likely to begin paying better rates sooner than large, national banks. The average rate paid on basic savings accounts insured by the Federal Deposit Insurance Corporation is just 0.06 percent, according to Bankrate. But rates are typically higher at online banks, which don’t have to maintain brick-and-mortar branches. Many online banks are offering rates of at least 0.5 percent for “high-yield” savings accounts, and some are offering cash bonuses — say, $100 or $200 — for opening accounts.
Ken Tumin, founder and editor of the financial website DepositAccounts, said he had already detected a slight uptick in rates, mainly on certificates of deposit, which lock in rates for a specific period, like three months, six months, one year or longer.
PenFed Credit Union is offering certificate rates of 1 percent for 15 months and 1.25 percent for two years. The online bank Synchrony offers a rate of 0.90 percent on a 15-month C.D., and both Synchrony and Marcus, Goldman Sachs’s digital consumer bank, are offering rates above 1 percent for C.D.s with five-year terms.
The catch with C.D.s is that while you can lock in a rate, you are stuck with it if rates rise, and penalties apply if you withdraw your money early. If you put your money into a five-year C.D., you may miss out if rates rise in the next couple of years. “Shorter terms are probably more appealing,” Mr. Tumin said.
At the very least, he said, before opening a C.D., check the penalty for early withdrawal. Depending on the details, you could still come out ahead if you withdraw your funds before maturity and open a higher-rate C.D. Consider a five-year C.D. at Live Oak Bank, a digital bank, now paying 1.3 percent, with an early-withdrawal penalty of six months of interest. If you keep it for at least a year before cashing it out, you’ll have earned an effective rate of 0.65 percent for the year — “not a terrible thing,” Mr. Tumin said. But other longer-term C.D.s may charge penalties of one year or more.
Some banks offer C.D.s with more flexibility. “No-penalty” C.D.s offer a somewhat lower rate in exchange for the option to withdraw the funds at any time, without forgoing any interest. That can be a good choice for emergency funds, which you may need to withdraw on short notice. And “add-on” C.D.s allow you to deposit extra funds into the account midway through the term. That can be a boon for people who want the higher rate of a C.D. but don’t have a big lump sum to contribute.
You could also consider a C.D. “ladder.” With this approach, you spread your funds among several C.D.s with different terms. When the shortest one comes due, you can roll the funds into a new longer-term (and hopefully higher-rate) C.D. This approach gives you more frequent access to your funds and avoids locking in all your cash at lower rates.
Another option is a rewards checking account. These accounts offer higher interest rates or cash back on purchases but may come with a host of rules and restrictions. “There’s always some hoops to jump through,” Mr. Tumin said. For instance, you may have to commit to making a minimum number of debit purchases each month. And many banks cap the balance on which the higher interest rate is paid.
This week, American Express began offering an online rewards checking account with no minimum deposits or transactions (the maximum balance: $5 million). The account pays 0.50 percent and has no monthly fees or minimum debit transaction requirements. Users earn one membership reward point for every $2 spent. But you must already hold an American Express consumer card to open the checking account. And as with most savings and checking accounts, the rate can change at any time.
One safe savings option that has been getting a lot of attention as inflation has surged is the government I (for inflation) bond. These savings bonds pay interest that combines a base rate that’s fixed for the life of the bond with a variable rate, based on inflation, that resets every six months. The bonds are paying an overall rate of 7.12 percent.
But there are some details to pay attention to: Once you buy the bonds, you can’t redeem them for one year. And if you redeem them before five years, you’ll lose your last three months of interest.
An individual can buy up to $10,000 in digital I bonds each year via the TreasuryDirect website. And you can buy an additional $5,000 in paper bonds using your income tax refund.
Here are some questions and answers about savings options:
Credit unions are member-owned financial institutions, and you typically must join to open an account. Membership is often restricted to people living in a certain area or sharing interests, like the same employer or service in the military. But rules have become more flexible in recent years. For instance, “everyone is eligible to apply” to join PenFed, said Spencer Kenyon, a spokesman, because it merged in 2019 with a credit union with an “open” charter. To join, you simply need to open and maintain a basic savings account with at least $5.
Smaller regional banks and online banks are more likely to offer higher rates but may be unfamiliar to consumers. But as long as the bank or credit union is federally insured, Mr. Tumin said, your funds are protected. The F.D.I.C. and its credit union counterpart, the National Credit Union Share Insurance Fund, protect savings deposits of up to $250,000 per depositor, per bank.
Banks must indicate that they are F.D.I.C. members. If you are unsure about a bank’s status, you can use the F.D.I.C.’s bank finder tool. Most so-called neo banks or fintech companies aren’t insured themselves but team up with F.D.I.C.-insured banks to hold deposits. The F.D.I.C. recommends confirming the details of how the company handles deposits. Customers should also verify the name of the bank holding the funds and confirm that it is federally insured.
Emergency savings should generally be kept in a liquid savings account so you can withdraw the funds quickly if you have an unexpected expense, said Kia McCallister-Young, co-director of America Saves, a campaign of the Consumer Federation of America.
Depending on how much of a cushion you have saved, you could put part of your reserve into a higher-rate certificate of deposit. But you should probably choose a shorter-term C.D. so your funds aren’t locked up for a long period. And if you’ve had trouble building a rainy-day fund, Ms. McCallister-Young said, tax time is a good time to start: You could put all or part of your refund aside to get the account started.
You could also check with your employer. About 15 percent of large employers offer options to help workers build rainy-day funds, according to the Employee Benefit Research Institute.
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