The idea is that since the U.S. central bank is making it more expensive to borrow money, the demand for goods and services will drop, thereby causing prices to fall. A side effect of those increased interest rates is that banks can increase the amount of money they pay to consumers who put some of their dollars in savings accounts. As banks earn more on the money they lend, those same institutions can offer higher returns to their customers.
Think of it as the virtuous cycle of the lending and saving relationship that banks have with their customers. But until recently, the interest earned on savings accounts hasn’t been all that impressive. “Every interest rate has fallen quite far from previous decades,” said Bankrate.com chief financial analyst Greg McBride in an email.
Up until this year, McBride said, interest rates had declined for the better part of 40 years — and so has the amount of money that banks pay into those accounts. “Looking back to the early 1980s, the Fed funds rate, Treasury yields, and mortgage rates were in the double digits,” he said. “In 1990, the Fed funds rate was over 8%, Treasury yields were 7% to 9%, mortgage rates were 10%.
“By 2020, the Fed funds rate was near zero, Treasury yields were under 2%, and mortgage rates were 2.5% to 3%.”Now that these rates are rising again, money costs more money. But that means there’s an opportunity to get higher returns on deposits. McBride advises customers to shop around to get the best return on their savings.
Not all banks have significantly increased their interest rates for savings accounts. According to the Federal Deposit Insurance Corp., the average national savings account interest rate is 0.17%. Those low interest rates on savings account deposits recently caught the attention of lawmakers on Capitol Hill, who pressed big bank CEOs last week on why rates weren’t higher.
“As rates continue to rise, we would expect to continue to raise the rates we pay to customers,” Wells Fargo CEO Charlie Scharf said in congressional testimony Thursday. Some financial institutions, especially those that are Internet-only with no brick-and-mortar locations, have traditionally advertised higher interest rates with their high-yield savings account products. Some of these banks offer more than 1% or 2% — and in some rare cases more than 3% on savings accounts, according to NerdWallet representative Chanelle Bessette.
Bessette said online banks have fewer overhead costs than brick-and-mortar branches, and also must do more to compete for deposits. Both Bankrate and NerdWallet offer lists of institutions currently offering the highest yields. Among them are Discover, Capital One, American Express Savings, and Marcus by Goldman Sachs. McBride, the chief financial analyst for Bankrate.com, said it is easy to enroll in one of those accounts, even if you do your primary banking elsewhere.
“You can open an online savings account with just a few minutes of your time, and link it to the checking account at your current financial institution in order to move money back and forth seamlessly,” he said. “If your bank has rolled out a new savings account with a higher yield than the one you’re currently in, just reach out and ask to transfer your money into the new, higher yielding account.”
In some cases, banks aren’t making it clear to existing customers that they can now obtain a greater savings-account yield, McBride said. “We are seeing some chicanery where banks roll out a new savings account that offers an attractive yield while the existing account holders remain in the original account with the original rate,” McBride said in an email.
“It is easy enough to switch to the new account, but you have to take the action to make that happen, the bank won’t come knocking on your door with that opportunity.”
Savings interest rates have slowly been going up in the last few months, and the Federal Reserve has continued to raise interest rates to address inflation. If you’re ready to take charge of your savings and find ways to earn more interest on your money, here are five options to explore.
1. Ask your bank for an increase in your savings rate
While savings interest rates have tentatively increased in the last few months across various financial institutions, this doesn’t necessarily mean your savings account will see a sudden bump in its rate.
If your bank hasn’t made an announcement yet, Maggie Gomez, CFP® professional and owner of Money with Maggie, suggests asking your bank for an increase in the current rate you receive.
Gomez explains some financial institutions won’t immediately deliver a higher rate unless consumers get proactive. “Later, to be more competitive, they’ll increase their rates more publicly, but I think it’ll be really slow,” Gomez adds.
2. Search online financial institutions for a high-yield savings account
According to the FDIC, the national average rate interest rate on savings accounts is 0.17% APY as of May 2022. However, several financial institutions pay much more than the national rate.
Jerel Butler, CFP® professional and founder of Millennial Financial Solutions, suggests looking at online financial institutions for competitive interest rates on savings accounts.
“It’s a little bit tricky with inflation going on,” Butler notes. “The best savings option for a typical savings account is an online savings account.”
Most banks earn compound interest daily. Meanwhile, credit unions usually earn compound interest monthly. If you’re not sure about your account’s compound frequency, contact your bank’s customer support.
3. Consider switching banks if the rate is worth it
Butler says you should also take the time to explore other financial institutions and compare different savings accounts.
“This is a great chance to take advantage of the rising interest rate market, and you may be able to take advantage of a welcome bonus at another bank,” adds Butler. “A lot of banks — as a result of the higher interest rates — are running special promotions, too.”
If you find a specific account that provides more compelling offers than your current bank, you might consider switching institutions.
4. Buy savings bonds
Savings bonds are federally issued debt securities. Lindsey Bell, chief markets and money strategist for Ally, says federally issued bonds are a safe investment option, although there are a couple of things to keep in mind.
“There’s a limit on what you can invest in those. They are also probably a little more volatile than a CD or savings account, so you have to take that into account,” explains Bell.
5. Build a CD ladder with short-term CDs if you find a competitive rate
Butler says building a CD ladder might be ideal if you find a competitive rate and are generally risk-averse. However, if you’re not risk-averse, Butler adds there are more options you should consider first.
CD ladders offer a way to take advantage of higher interest rates on CDs. Instead of depositing all your money into a single CD and locking your deposits for a set time, you’ll split your savings into a mix of term lengths.
Bell suggests sticking to CDs under one or two-year terms. If interest rates increase during the year, a CD ladder provides enough flexibility to buy a new CD once your short-term accounts mature.