How to make more money with your savings now that the banks are raising interest rates
The Federal Reserve has raised its key rate five times this year, most recently on Wednesday, as part of its ongoing efforts to slow the pace of inflation.
The idea is that since the US central bank makes it more expensive to borrow money, the demand for goods and services will fall, causing prices to fall.
A side effect of these increased interest rates is that banks may increase the amount of money they pay out to consumers who put some of their money in savings accounts. As banks earn more on the money they lend, these same institutions can offer higher returns to their customers.
Think of it as the virtuous cycle of the lending and saving relationship that banks have with their customers. But until recently, the interest earned on savings accounts wasn’t that impressive.
“Each interest rate has fallen quite far from previous decades,” Greg McBride, chief financial analyst at Bankrate.com, said in an email.
Until this year, McBride said, interest rates had fallen for nearly 40 years, as had the amount of money banks put into those accounts.
“Looking back to the early 1980s, the federal funds rate, Treasury yields and mortgage rates were in the double digits,” he said. “In 1990, the federal funds rate was over 8%, Treasury yields were 7% to 9%, mortgage rates were 10%.
“In 2020, the fed funds rate was close to zero, Treasury yields were below 2%, and mortgage rates were 2.5% to 3%.”
Now that these rates are rising again, money is more expensive.
But this means that there is an opportunity to get higher returns on deposits. McBride advises customers to shop around for the best return on their savings.
Not all banks have significantly increased their interest rates for savings accounts. According to the Federal Deposit Insurance Corp., the average interest rate for domestic savings accounts is 0.17%.
These low interest rates on deposits in savings accounts recently caught the attention of lawmakers on Capitol Hill, who last week asked CEOs of major banks why rates weren’t higher.
“As rates continue to rise, we expect to continue to increase the rates we pay customers,” Wells Fargo CEO Charlie Scharf said in congressional testimony Thursday.
Some financial institutions, especially those that are internet-only and have no physical location, have traditionally advertised higher interest rates with their high-yield savings account products. Some of these banks offer more than 1% or 2% — and in rare cases more than 3% on savings accounts, according to NerdWallet representative Chanelle Bessette.
Bessette said online banks have less overhead than brick-and-mortar branches, and they also have to do more to compete with deposits.
Bankrate and NerdWallet both offer lists of institutions currently offering the highest yields. Among them are Discover, Capital One, American Express Savings and Marcus of Goldman Sachs.
McBride, Bankrate.com’s chief financial analyst, said it’s easy to sign up for one of these accounts, even if you do your primary banking elsewhere.
“You can open an online savings account in just minutes and link it to your current financial institution’s checking account to transfer money seamlessly,” he said. “If your bank has rolled out a new savings account with a higher yield than the one you are currently in, contact us and ask to transfer your money to the new higher yielding account.”
In some cases, banks aren’t making it clear to existing customers that they can now get a better return from the savings account, McBride said.
“We are seeing a scam where banks are rolling out a new savings account that offers an attractive return while existing account holders remain in the original account with the original rate,” McBride said in an e-mail. mail.
“It’s quite easy to switch to the new account, but you have to take the necessary steps to make it happen, the bank won’t come knocking on your door with this opportunity.”
Brian Cheung contributed.