Don’t expect higher savings rates anytime soon

Interest rates should start to rise this year, and that should be good news for savers, right?

Probably not right away. The Federal Reserve is expected to start raising borrowing costs in March and possibly several more times this year. But deposit rates paid to savers will likely rise at a much slower pace, analysts said. So you shouldn’t expect to see much higher rates on your emergency reserve anytime soon.

Indeed, the big banks are plentiful with cash and don’t need to raise rates quickly to attract more deposits, said Greg McBride, chief financial analyst at financial website Bankrate. “It will be long.”

That means there will continue to be a gap for some time between the rates banks pay depositors and inflation, which has been rising in recent months largely due to the pandemic.

“This is the year the gap starts to narrow,” McBride said. “But you have to have your money in the right place.”

Yet even the best rates aren’t that good. But some savers may prefer to keep their money safe, given recent stock market volatility. Here are some of the options.

McBride said smaller banks and online banks are likely to start paying better rates sooner than larger national banks. The average rate paid on basic savings accounts insured by the Federal Deposit Insurance Corp. is only 0.06%, according to Bankrate. But rates are generally higher at online banks, which don’t have to maintain physical branches. Many online banks offer rates of at least 0.5% for “high yield” savings accounts, and some offer cash bonuses, say $100 or $200, for opening accounts.

Ken Tumin, founder and publisher of the financial website DepositAccounts, said he detected a slight rise in rates, mainly on certificates of deposit, which lock in rates for a specific period, such as three months, six months, a year or more.

PenFed Credit Union offers certificate rates of 1% for 15 months and 1.25% for two years. Online banking Synchrony is offering a rate of 0.90% on a 15-month CD, and Synchrony and Marcus, Goldman Sachs’ consumer digital bank, are offering rates above 1% for five-month CDs. years.

The catch with CDs is that even though you can lock in a rate, you’re stuck with it if rates go up, and penalties apply if you withdraw your money early. If you put your money in a five-year CD, you could miss out if rates rise over the next two years. “Shorter terms are probably more attractive,” Tumin said.

At the very least, he says, before opening a CD, check the early withdrawal penalty. Depending on the details, you could come out on top if you withdraw your funds before maturity and open a higher rate CD. Take the example of a five-year CD at Live Oak Bank, a digital bank, which now pays 1.3%, with an early withdrawal penalty of six months interest. If you hold it for at least a year before cashing it out, you’ll have earned an effective rate of 0.65% for the year — “not a terrible thing,” Tumin said. But other longer-term CDs may charge penalties of a year or more.

Some banks offer CDs with more flexibility. “No penalty” CDs offer a slightly lower rate in exchange for the ability to withdraw the funds at any time, without forgoing any interest. It can be a good choice for emergency funds, which you may need to withdraw on short notice. And “additional” CDs allow you to deposit additional funds into the account mid-term. This can be a boon for people who want the higher rate of a CD but don’t have a large lump sum to contribute.

You can also consider a CD “ladder”. With this approach, you spread your funds across multiple CDs with different terms. When the shorter one matures, you can transfer the funds to a new, longer-term (and hopefully higher-rate) CD. This approach gives you more frequent access to your funds and avoids locking up all your money at lower rates.

Another option is a rewards checking account. These accounts offer higher interest rates or cash back on purchases, but can come with a host of rules and restrictions. “There are always hurdles to overcome,” Tumin said. For example, you may need to commit to making a minimum number of debit purchases each month. And many banks cap the balance on which the higher interest rate is paid.

This month, American Express began offering an online rewards checking account with no deposit or minimum transaction (maximum balance: $5 million). The account pays 0.50% and has no monthly fees or minimum debit transaction requirements. Users earn 1 membership reward point for every $2 spent. But you must already have an American Express consumer card to open the current account. And like most savings and checking accounts, the rate can change at any time.

A safe savings option that has garnered a lot of attention as inflation has surged is the I (for inflation) government bond. These savings bonds pay interest that combines a fixed base rate for the life of the bond and a floating rate, based on inflation, which resets every six months. The bonds pay an overall rate of 7.12%.

But there are a few details to pay attention to: once you’ve bought the bonds, you can’t redeem them for a year. And if you redeem them before five years, you will lose your last three months of interest.

An individual can purchase up to $10,000 in digital I bonds each year through the TreasuryDirect website. And you can buy an additional $5,000 in paper bonds using your income tax refund.

Here are some questions and answers about savings options:

Do I need to be a member of a credit union to open an account?

Credit unions are member-owned financial institutions and you usually need to register to open an account. Membership is often limited to people living in a certain area or sharing interests, such as the same employer or service in the military. But the rules have become more flexible in recent years. For example, “everyone is eligible to apply” to join PenFed, said Spencer Kenyon, a spokesperson, because it merged in 2019 with a credit union with an “open” charter. To join, all you need to do is open and maintain a basic savings account with at least $5.

I found a bank that offered higher savings rates, but I had never heard of them before. Is it safe?

Smaller regional banks and online banks are more likely to offer higher rates, but may be unfamiliar to consumers. But as long as the bank or credit union is federally insured, Tumin said, your funds are safe. The FDIC and its credit union counterpart, the National Credit Union Share Insurance Fund, protect savings deposits up to $250,000 per depositor per bank.

Banks must indicate that they are members of the FDIC. If you are unsure of a bank’s status, you can use the FDIC’s bank finder tool. Most so-called neo-banks or fintech companies are not themselves insured but partner with FDIC-insured banks to hold deposits. The FDIC recommends confirming details of how the company handles deposits. Customers should also verify the name of the bank holding the funds and confirm that it is federally insured.

Should I keep my emergency savings in a Basic Savings Account or seek higher rates?

Emergency savings should generally be kept in a liquid savings account so you can withdraw the funds quickly if you have an unexpected expense, said Kia McCallister-Young, co-director of America Saves, a Consumer Federation of America.

Depending on how much of a cushion you have saved, you can put a portion of your reserve into a higher rate certificate of deposit. But you should probably choose a shorter term CD so the funds aren’t tied up for a long time. And if you’ve struggled to build a rainy day fund, McCallister-Young said, tax time is a good time to start; you can put all or part of your refund aside to start the account.

You can also check with your employer. According to the Benefits Research Institute, about 15% of large employers offer options to help workers build up hard-day funds.

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