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Banks are starting to pay a higher return on your cash – good news for savers who have seen their stocks weaken by a gruesome combination of low interest rates and high inflation.
However, some banks are moving faster than others. Some, especially traditional brick-and-mortar stores, may not shake for a while.
At least 1[ads1]0 banks have raised interest rates on their high-interest savings accounts or money market deposit accounts since mid-April, according to data collected 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 returns earlier in 2022.
The rates are still relatively low – no one pays more than 1% yet. Most are in the range of about half a percent up to 0.80%, according to Bankrate data.
But the accounts with the highest returns pay about 10 times more than the national average, which is 0.06%, according to Greg McBride, financial analyst at Bankrate.
And consumer returns are likely to climb steadily higher as the Federal Reserve continues to raise its benchmark rate to curb inflation. The central bank cut interest rates to bottom levels in the early days of the Covid-19 pandemic to support the economy.
“If the Fed ends up being as aggressive as they are expected to be, the top-yielding savings accounts could clear 2% later this year,” McBride said.
“It’s the only place in the financial world where you get a free lunch with a higher return without a higher 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 safe (deposits are insured by the Federal Deposit Insurance Corporation) and liquid (they can be reached at any time).
Savers should aim to have several months of household expenses available, in case of 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 on essential living expenses (shelter, food and medicine costs), plus an additional three months for each child in the household.
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Consumers also do not have to move all their money. They can continue to manage their day-to-day finances (such as their current accounts) at their current bank to avoid the hassle of switching, and open an account at a new emergency-only bank, McBride said.
Not all banks increase payments or do so at the same rate.
Mostly those who have increased their account prices (some have done so several times in 2022) are online banks or the online banking branches of traditional physical banks.
They have lower fixed costs and can use the lid with higher prices to compete with traditional stores, which have the majority of customer deposits and are “in no hurry” to increase payments, McBride said.
When the Federal Reserve raises its reference rate – known as the Fed Funds rate – it increases borrowing costs. Loans are becoming more expensive for consumers and businesses.
Banks make money on lending rates. As the Federal Reserve raises its reference rate, banks receive more income from higher loan interest payments and may therefore find themselves better positioned to pay a larger return on customers’ savings.
The central bank raised its reference rate by half a percentage point on Wednesday, the largest increase in more than two decades.
However, this tipping effect will not necessarily apply to 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 unparalleled degree in the first months of the pandemic, in part because of cash hoarding and the flow of public payments as stimulus checks.
As a result, most banks may not see the need to pay higher savings branches to attract deposits and fuel their lending machine.
Even when a handful of banks increase payments, consumers are still struggling to keep up with inflation.
The consumer price index, an important measure of inflation, jumped by 8.5% in March 2022 from a year earlier, the fastest 12-month increase since December 1981. As a result, money is losing its value at a high rate.
“Overall, you’re still well below inflation,” Sun, a member of CNBC’s Advisor Council, said of high-yield savings rates.
However, she added: “Sometimes we have to be comfortable receiving less return for less [worry]. “
Savers can choose different approaches to emergency savings, depending on their household situation, Sun said.
For example, individuals who do not want to open their own high-yield savings account at another bank may be able to recreate that return on an emergency cash account by investing 5% to 10% (depending on risk appetite) in a simple balanced fund split between stocks and bonds, she said.
However, this investment is subject to market risk. In an emergency, savers will use the money (and not the invested assets) to the extent possible.
People who do not have the financial capacity to finance both an emergency savings and pension account can also consider an individual pension account from Roth, Sun said. In the event of an emergency, investors can use their Roth IRA contributions as a last resort. (Doing so does not result in a tax penalty, although withdrawal of investment income can in a few cases, such as withdrawals before the age of 59½. Roth IRAs also have annual contribution limits.)