You might be losing out if you have cash in a basic savings account at a large bank, with interest rates rising and banks offering minimal returns on traditional savings accounts.
You can find alternative savings accounts to traditional savings accounts thanks to the Federal Reserve rate increases that began last year. Some options pay an annual percentage yield (APY) of 4% or higher.
If you are looking for higher rates, Treasury bills and money market accounts as well as certificates of deposit may be worth your consideration.
The key takeaway: With interest rates rising, it’s likely that you’ll find other accounts that will let you make more money on your savings.
Why savings rates have risen
The Fed reduced short-term interest rates to support the economy during the pandemic. This kept savings bank APYs relatively low and helped keep the economy afloat. Inflation had risen by the end of 2021 and the Fed quickly changed its mind, initiating a series rate hikes to cool down an overheated economy.
You could lose money if interest rates rise. Instead, keep your cash in a traditional savings bank. Let’s do the math.
Your $1,000 would earn you $3.50 per year if it were to be deposited in a savings account at a large bank paying the current average rate, 0.35%.
You would earn $30 if you invested the same $1,000 in a high yield savings account that pays a 3% annual percentage yield. The more your bank balance is, the more you can gain.
Savings with high yield
You don’t have to look beyond high-yield savings and checking accounts when you are looking for higher returns. These are just a few of the many options available to help you achieve your short-term savings goals.
- High-yield savings account — These accounts are often available online and can offer much higher interest rates than traditional savings accounts.
- High yield money market accounts — A Money market account is basically a combination of a savings and checking account. You can write only a few checks per month and make debit purchases occasionally.
- Treasury bills — Treasury bill are short-term investments you can redeem for face value within one year. At TreasuryDirect, you can purchase T-bills online. In February 2023, the rates for a 6-month T-bill were at 4.85%.
- Certificates for deposit A certificate of deposit A bank account that offers higher interest rates in return for locking away your money for a specific period of time will pay you a higher rate of interest.
Check out our selections of the top high-yield savings account.
Why savings are important
Unexpected expenses can happen at any time, so you never know what day it might be. You can keep your finances in order by having an emergency fund at your disposal.
What should I do
- How much cash to have on hand It is a good rule of thumb to keep enough cash aside to cover three to six month’s living expenses. Even $1,000 is a good starting point.
- Where to store an emergency fund Safe storage and easy access are key. A regular savings account or high-yield savings accounts may be the best option.
- When to tap it — In general, you should only tap your emergency fund as a last resort. Before you tap your emergency fund, it is a good idea to make guidelines.