Making sure your money is working hard for you is an important skill if you want to be in good financial health. While it might be easier to keep all your money in the same accounts (“set and forget”) in every case, such a policy could result in you potentially missing out on hundreds, if not thousands, of dollars. With interest rates rising, it’s a good idea to look at where your money is stored and make sure you’re getting the best possible deal.
Why are interest rates on savings accounts rising?
Savings rates vary for a variety of reasons, but many banks tie the rates they charge on loans and the rates they pay on savings accounts to the Fed Funds Rate, which is controlled by the US Federal Reserve. As the fed funds rate rises, this is causing many banks to also increase the interest they pay on savings accounts. The target for the federal funds rate is up 3% year-to-date.
What is the best savings rate?
Savings rates at various banks and financial institutions are constantly changing. Not only are banks updated when the Federal Reserve updates the Fed Funds Rate, they can update their savings rates at any time for promotions or other reasons. Mint tracks savings rates, so check this out to see what types of rates are available to you. In October 2022, it’s not uncommon for savings accounts to pay 2% to 3% or even more.
What are you doing with your money now?
It’s important to understand how rising interest rates affect you and where you should invest your money. If you have your money in a checking or savings account with an interest rate close to zero, you might want to consider opening a new account with a higher interest rate. You might even be able to get a welcome bonus when you open a new bank account.
Here are a few more ideas on what to do with your money:
pay off debts
If you have high-interest consumer debt, paying it off may be the best financial move for you. While it makes sense to keep some money in an emergency fund, it might not make sense to put money in a savings account that earns 3% while paying 20% on a credit card balance. Instead, it may make sense to put some of your extra money toward paying down your debt.
Open Certificate of Deposit (CD).
Like savings accounts, interest rates on certificates of deposit (CDs) have increased since the beginning of the year. The disadvantage of a CD is that you cannot access your funds until the end of the term without penalty. If you’re not sure what interest rates might be in months or years to come, you should be careful not to invest too much money in CDs. Still, they can make a lot of sense in the right situation.
Consider Series I bonds
Another option to consider could be Series I bonds offered by the US Treasury. I Bonds are a type of savings bond that can protect you from inflation. When you buy an I-Bond, you earn both a fixed interest rate and an inflation-linked interest rate. Twice a year, the Treasury 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 purchase up to $10,000 per year in electronic I-Bonds per person, and you can also receive up to $5,000 in paper bonds as part of your tax return. You can also give Bonds away or purchase additional I Bonds for your children. Buying bonds can be a good way to diversify your holdings, but you must buy before October 28 to ensure your bond earns the 9.62% interest rate. Otherwise, for the next six months, you will earn the interest rate announced in November 2022. An important note about I-Bonds is that you must keep 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 final result
With interest rates rising, it’s important to constantly monitor where you’re storing your extra money. If you still have a significant amount of savings in an account that is earning a near-zero interest rate, you might want to look around and find a better place to keep your money. Paying off debt, buying a CD, or buying Series I Bonds may be better options for you — so explore your options, do your research, and make the best decision for your unique financial situation.
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