Where to get the best return on your cash amid rising interest rates

When the Federal Reserve raised the target federal funds rate by another 0.75 percentage points this month, it opened up some new opportunities for savers to get a better return on their cash.

The Fed’s move is aimed at combating high inflation, which is driving up housing, food and energy costs.

The bad news for consumers is that their debt will become more expensive as interest rates on credit cards and other balances may rise.

But the good news is that savings returns will continue to rise.

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The Federal Reserve has raised interest rates by just 3 percent this year, according to chief financial analyst Greg McBride, but indicates it will raise them by at least another percentage point by the end of the year. Bankrate.com.

There could be more rate hikes in 2023, depending on the path of inflation.

Now is a great time to reconsider where you put your savings, McBride said.

“Interest rates are rising at the fastest rate in 40 years,” McBride said. “Even if you’ve never looked, now is the time.”

Online savings accounts

The September rate hike is already sending some online savings accounts higher.

According to McBride, some interest rates are already at 3% after starting the year at 0.55% and are poised to continue rising.

“We are at levels we haven’t seen since 2009.

It should be noted that the interest rate increase was concentrated in online accounts, while deposits in brick and mortar banks generally did not change much.

Among online savings accounts, larger providers are lagging behind the Fed’s moves, while smaller providers are being more aggressive in reaching the 3% rate, according to Ken Toomey, senior industry analyst at LendingTree.

Credit unions that also offer savings accounts have also been more aggressive in responding to central bank interest rate hikes.

Financial institutions that charge a 3% rate include Dollar Savings Direct and Quorum, according to McBride.

Others that have already had their rates raised include Indiana Merchants Bank and certain accounts at Elements Financial, an Indiana-based credit union, Toomey said.

Certificates of deposit

At the same time, certificates of deposit will allow you to lock in an interest rate for a fixed period of time, known as the maturity date, from six months to five years.

Yields on these products also rise to 3% across the maturity spectrum, McBride said.

“That 3% yield is the best we’ve seen in years,” McBride said. “But they’re probably going to go higher, especially in the shorter maturities, the one- and two-year CDs.”

The downside is that a CD rate that looks attractive now may not be so attractive six months from now if the Fed continues to raise rates, Tumin said.

For more flexibility, savers may want to look for CDs that come with reduced or no withdrawal penalties, allowing them to move their money if more attractive returns are available elsewhere, Tumin said.

Some banks and credit unions offer supplemental CDs, where you invest a certain amount at a certain interest rate and then have the option to add more money at the same rate of return.

For example, Navy Federal Credit Union has a 20-month CD with an additional feature that requires a minimum deposit of $1,000, according to Tumin.

I closes the series

As inflation reaches historic highs, Series I bonds are increasingly popular for their ability to match these high costs.

Series I bonds currently offer an interest rate of 9.62%, which experts admit is hard to beat anywhere else. This percentage should be reset in November based on the latest inflation data. According to Tumin, the expectation is that it could be north of 6%.

I bonds are certainly worth considering in certain situations, but they are no substitute for an adequately funded emergency savings account.

Greg McBride

Senior Financial Analyst at Bankrate.com

“If you buy in October, you’ll get six months of that 9.62%, and then you’ll probably get something over 6%,” Tumin said.

But Series I bonds also have their drawbacks. The money cannot be cashed out in the first year, and if you withdraw before five years, you lose three months of interest.

“Bonds are certainly worth considering under certain circumstances, but they are no substitute for an adequately funded emergency savings account,” McBride said.

When should liquidity be a priority?

Surveys consistently show that setting aside an adequate emergency fund is a challenge for many savers, and rapidly rising rates have made it even more difficult for many.

If you don’t have an emergency fund for at least three to six months of expenses, liquidity should be your first priority when it comes to saving cash, McBride said.

In that case, online savings accounts are usually your best option, he said.

If you’re just starting out, the good news is a small goal, say $25 a week, can add up over time if you save consistently.

The key is to pay yourself first, McBride said, even if you’re paying off credit card debt.

“It’s not just the 3% you earn in a savings account,” McBride said. “It’s also a buffer between you and your 18% credit card debt when unexpected expenses arise.”

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