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Banks are starting to pay higher returns on your cash – good news for savers who have seen their inventories languish due to a horrific combination of low interest rates and high inflation.
However, some banks move faster than others. Some, especially traditional brick and mortar stores, may not give way for a while.
According to data from Bankrate, at least 10 banks have raised interest rates on their high-yield savings or money market deposit accounts since mid-April.
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 raised yields earlier in 2022.
The rates are still relatively low – nobody pays more than 1% anymore. Most are in the range of about half a percent to 0.80%, according to data from Bankrate.
But the highest-yielding accounts pay about 10 times the national average, which is 0.06%, according to Greg McBride, chief financial analyst at Bankrate.
And consumer returns are likely to rise steadily as the Federal Reserve continues to raise its benchmark interest rate to curb inflation. The central bank cut that rate to its lowest level in the early days of the Covid-19 pandemic to support the economy.
“If the Fed eventually becomes as aggressive as expected, the best-performing savings accounts could pick up 2% later this year,” McBride said.
“It’s the only place in the financial world where you get the free lunch with a higher return with no higher risk,” he added. “It’s pure gravy.”
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Financial advisors often advise savers to park their emergency money in these types of accounts. Funds are safe (deposits are insured by the Federal Deposit Insurance Corporation) and liquid (they can be accessed at any time).
Savers should aim to have household expenses on hand for several months in the event of a job loss or other unforeseen event.
Financial advisor Winnie Sun, co-founder of Sun Group Wealth Partners in Irvine, Calif., recommends saving at least six months in critical living costs (housing, food, and medicine), plus three additional months for each child in the household .
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Consumers also don’t have to move all their money. They can continue to manage their day-to-day finances (for example, their checking accounts) at their current bank to avoid the hassle of switching, and open an account at a new bank solely for emergency funds, McBride said.
Not every bank increases its payouts or does so at the same rate.
For the most part, those who have increased their account rates (some have done so several times in 2022) are online banks or the online banking divisions of traditional brick-and-mortar banks.
They have lower overheads and can use the appeal of higher rates to compete with traditional stores, which hold the lion’s share of customer deposits and are “in no rush” to increase payouts, McBride said.
When the Federal Reserve raises its benchmark interest rate — known as the fed funds rate — it increases the cost of borrowing. Loans are becoming more expensive for consumers and businesses.
Banks make money from interest on loans. As the Federal Reserve raises its benchmark interest rate, banks will earn more income from higher interest payments on loans and may therefore be better positioned to pay higher returns on customer savings.
The central bank raised its benchmark by half a percentage point on Wednesday, the largest increase in more than two decades.
However, this wipe effect will not necessarily apply to all settings 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, partly due to the hoarding of cash and the flow of government payments such as stimulus checks.
As a result, most banks may not see the need to pay higher savings account rates to attract deposits and fuel their lending machine.
Even with a handful of banks increasing payouts, consumers are still struggling to keep up with inflation.
The consumer price index, a key inflation indicator, rose 8.5% in March 2022 from a year earlier, the fastest 12-month rise since December 1981. As a result, money is losing its value at a faster rate.
“In general, you’re still well below inflation,” Sun, a member of the CNBC advisory board, said of interest on high-yield savings accounts.
However, she added, “Sometimes we have to feel comfortable getting less in return for less.” [worry]†
Savers can take different approaches to emergency savings, depending on their family situation, Sun said.
For example, individuals who don’t want to open a separate high-yield savings account with another bank may be able to replicate that return on an emergency cash account by investing 5% to 10% (depending on one’s risk appetite) in a simple balanced distribution of the fund. between stocks and bonds, she said.
However, this investment is subject to market risk. In an emergency, savers would tap into the money (and not the invested capital) as much as possible.
Individuals who don’t have the financial capacity to fund both an emergency savings account and a retirement account may also want to consider a Roth individual retirement account, Sun said. In an emergency, investors can use their Roth IRA contributions as a last resort. (This does not impose a tax penalty, although withdrawing investment income can be in some cases, such as withdrawing before age 59. Roth IRAs also have annual contribution limits.)