Your cash savings can earn a higher return, but only with certain banks
Guido Mieth | Digital Vision | Getty Images
Banks are starting to pay a higher yield on your cash – good news for savers who have seen their stock holdings languish due to a cruel combination of low interest rates and high inflation.
However, some banks are moving faster than others. Some, especially traditional brick-and-mortar stores, may not budge for a while.
At least 10 banks have raised interest rates on their high-yield savings accounts or money market deposits since mid-April, according to data compiled by Bankrate.
According to Bankrate, these 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. A handful of others increased yields in early 2022.
Rates are still relatively low – no one pays more than 1% yet. Most are in the range of about half a percent to 0.80%, according to Bankrate data.
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 yields should rise steadily as the US Federal Reserve continues to raise its benchmark interest rate to curb inflation. The central bank cut that rate to rock-bottom levels in the early days of the Covid-19 pandemic to prop up the economy.
“If the Fed ends up being as aggressive as it’s expected to be, the top-yielding savings accounts could shed 2% later this year,” McBride said.
“It’s the only place in finance where you get the free lunch with higher returns without higher risk,” he added. “It’s pure gravy.”
Guido Mieth | Digital Vision | Getty Images
Financial advisors often recommend savers to park their emergency funds in such accounts. Funds are safe (deposits are insured by the Federal Deposit Insurance Corporation) and liquid (available at all times).
Savers should aim to have several months of household expenses on hand 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 on essential living expenses (like housing, groceries and medicines), plus an additional three months for each child in the household.
More from Personal Finance:
That means the Fed’s half-point rate hike for your money
Should Mortgage Rates Rise, Should You Buy or Rent a Home?
Rising interest rates mean higher car loan costs
Consumers also don’t need to move all of their funds. They can continue to manage their day-to-day finances (such as their checking accounts) at their current bank to avoid the hassle of switching, and open an account at a new bank just for emergency funds, McBride said.
Not every bank is increasing their payouts or is doing so at the same pace.
Those who have increased their account rates (some have done so multiple times in 2022) are mostly 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 hurry” to increase payouts, McBride said.
When the Federal Reserve raises its benchmark interest rate — known as the fed funds rate — it raises the cost of borrowing. Credit is becoming more expensive for consumers and businesses.
Banks make money from interest on loans. If the US Federal Reserve raises its benchmark interest rate, banks will generate more revenue from higher loan interest payments and may therefore be in a better position to pay a higher return on customer deposits.
The central bank raised interest rates by half a percentage point on Wednesday, the largest hike in more than two decades.
However, this seesaw effect does not necessarily apply to all institutions due to another factor. Banks use deposits to lend money to other customers. But customers flooded the US banking system with cash at an unprecedented rate during the first few months of the pandemic, in part due to cash hoarding and the flow of government payments like stimulus checks.
As a result, most banks may see no need to pay higher interest on savings accounts to attract deposits and boost their lending engine.
Even as a handful of banks increase payouts, consumers are still in on it struggling to keep up with inflation.
The consumer price index, a key indicator of inflation, rose 8.5% year-on-year in March 2022, the fastest 12-month increase since December 1981. As a result, money is depreciating at an accelerated rate.
“Overall, they’re still well below inflationary levels,” Sun, a member of CNBC’s advisory board, said of interest rates on high-yield savings accounts.
However, she added: “Sometimes we have to be content with getting less return for less [worry].”
Savers can choose different approaches with emergency savings depending on their budget situation, Sun said.
For example, people who don’t want to open a separate high-yield savings account at another bank may be able to replicate those returns in an emergency account by investing 5% to 10% (depending on risk tolerance) in a simple balanced fund split between stocks and bonds, she said.
However, this investment is subject to market risk. In an emergency, savers would tap into the cash (and not the invested assets) as much as possible.
People who don’t have the financial ability to fund both an emergency savings and retirement account may also consider a Roth Individual Retirement Account, the Sun said. In an emergency, investors can fall back on their Roth IRA contributions as a last resort. (This does not carry a tax penalty, although in some cases the withdrawal of investment income might be cases like retiring before the age of 59. Roth IRAs also have annual contribution limits.)