Buying a savings account finally pays off
With rising interest rates, consumers face a Catch-22.
When the Federal Reserve raises its target rate, banks follow suit by raising the cost of borrowing on everything from credit cards to home equity lines of credit.
And yet the deposit rate, i.e. the interest rate that banks pay their account holders, hardly moves – the current average interest rate on a savings account is still near the bottom at just 0.18%, according to Bankrate.
“Banks have been known to cut rates fast and raise them slowly,” said Ric Edelman, founder and executive chairman of Edelman Financial Services.
In fact, banks’ terms allow them to be slower to raise rates on savings products than they are on loans.
However, competition between online banks is finally paying off.
“They keep raising rates in an effort to outperform each other,” said Greg McBride, chief financial analyst at Bankrate.com. “You can find significantly higher savings rates by shopping around.”
Currently, the best performing savings accounts could reach 2%, according to Bankrate. (Online banks are able to offer higher yielding online accounts because they incur less overhead than traditional bank accounts.)
In total, depositors now have $11.95 trillion in U.S. commercial banks, near a record high, according to data from the Federal Reserve Bank of St. Louis.
The average savers balance is $40,840, according to a MagnifyMoney estimate based on Federal Reserve consumer credit data.
At 0.18%, a deposit of $40,000 only returns $72 after one year. At 2%, that same deposit of $40,000 would return $800, a difference of $728.
“If you could make close to $1,000 a year, that’s real money,” said Nick Clements, co-founder and chief content officer at MagnifyMoney.com. “You’re not going to get rich, but that’s not unimportant.”
Plus, “if you don’t keep pace with inflation, you lose money,” McBride added. “The Federal Reserve is trying to bring inflation down to 2% – that’s the scarecrow to aim for.”
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You can earn even more with CDs, or certificates of deposit, if you don’t need your money for an extended period of time and are shopping. The national average is still just 0.51%, but the average for high-yield CDs is 2.2%, according to Bankrate.
(With CDs, you can withdraw the interest at any time during the term, but there are penalties for withdrawing the initial deposit. To avoid tying up too much money at once, savers can also “stagger” their CD, where you deposit money into , a one-, two-, and three-year CD, for example.)