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Banks are starting to pay a higher return on their money – good news for savers who have seen their reserves languish from a frightening combination of low interest rates and high inflation.
However, some banks are moving faster than others. Some, especially the traditional brick and mortar stores, may not move for a while.
At least 10 banks have raised interest rates on their high-yield savings accounts or money market deposit accounts since mid-April, according to data compiled by Bankrate.
They 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, according to Bankrate. A handful of others increased yields in early 2022.
Rates are still relatively low; none still pay more than 1%. Most are in the range of about half a percent to 0.80%, according to Bankrate data.
But higher-paying accounts pay about 10 times more than the national average, which is 0.06%, according to Greg McBride, chief financial analyst at Bankrate.
And consumer yields are likely to rise steadily as the Federal Reserve continues to raise its benchmark interest rate to curb inflation. The central bank reduced that rate to lower levels in the early days of the Covid-19 pandemic to help boost the economy.
“If the Fed ends up being as aggressive as it is expected to be, higher-yield savings accounts could settle 2% later this year,” McBride said.
“It’s the only place in the world of finance where you get the highest-performing free lunch without the highest risk,” he added. “It’s pure sauce.”
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Financial advisors often recommend that savers park their emergency funds in this type of account. The funds are secure (deposits are insured by the Federal Deposit Insurance Corporation) and liquid (they can be accessed at any time).
Savers must bet on having 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, California, recommends saving at least six months of crucial living expenses (shelter, food and medicine costs), plus an additional three months for each child in the household.
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Consumers also don’t need to move all their funds. They can continue to manage their day-to-day finances (their current accounts, for example) in their current bank to avoid the hassle of switching, and open an account at a new bank just for emergency funds, McBride said.
Not all banks are increasing their payments or doing so at the same rate.
To a large extent, those who have increased their account rates (some have done so several times in 2022) are the online banks or the online banking divisions of traditional banks.
They have lower overhead costs and can use the attractiveness of higher rates to compete with traditional stores, which own most of the customer deposits and are “in no hurry” to increase payments, McBride said.
When the Federal Reserve raises its benchmark interest rate, known as the federal funds rate, the cost of borrowing increases. Loans are more expensive for consumers and businesses.
Banks make money with loan interest. As the Federal Reserve raises its benchmark rate, banks get more revenue from higher loan interest payments, and therefore may be better positioned to pay higher yields on customer savings.
The central bank raised its benchmark by half a percentage point on Wednesday, the largest increase in more than two decades.
However, this rocking effect will not necessarily be true for all institutions, due to another factor. Banks use deposits to lend money to other customers. But customers flooded the U.S. banking system with cash to an unprecedented degree in the early months of the pandemic, due in part to the accumulation of cash and the flow of government payments such as stimulus checks.
As a result, most banks may not see the need to pay higher rates in the savings account to attract deposits and feed their lending machine.
Although a handful of banks increase payments, consumers continue to struggle to keep pace with inflation.
The consumer price index, a key indicator of inflation, jumped 8.5% in March 2022 from the previous year, the fastest increase in 12 months since December 1981. As a result, money is losing its value at a high rate.
“Overall, it’s still well below inflation levels,” Sun, a member of CNBC’s Advisory Board, said of high-yield savings account rates.
However, he added: “Sometimes we have to be comfortable receiving less return for less [worry]. “
Savers can opt for different approaches with emergency savings, depending on the location of their home, Sun said.
For example, people who do not want to open a separate high-yield savings account at another bank may be able to replicate those returns in the emergency cash account by investing between 5% and 10% (depending on risk appetite) in a simple division of balanced funds. between stocks and bonds, he said.
However, this investment is subject to market risk. In the event of an emergency, savers would use the money (not the assets invested) as much as possible.
People who do not have the financial capacity to fund both an emergency savings account and a retirement account may also consider an individual Roth retirement account, Sun said. In the event of an emergency, investors can use their Roth IRA contributions as a last resort. (Doing so does not involve a tax penalty, although the withdrawal of investment earnings may in some cases, such as withdrawal before the age of 59 and a half. Roth IRAs also have annual contribution limits).