Savings account interest rates on the rise. Check those rates!
While it may sound like a catchy title, I think there’s an opportunity to increase your returns without dramatically increasing risk just by paying closer attention to your bank statements. For years, interest rates have been close to record lows. Since the beginning of this year, rates have increased to the point where savings accounts are (finally) paying significantly more than checking accounts.
One of the challenges of holding too much money in your checking account or a low interest savings account is the impact of inflation which reduces the purchasing power of your money (in other words, the same dollar buys less goods and services than it did a year ago). With inflation averaging over eight percent over the past year, earning more on your savings reduces this particular risk. Unfortunately (perhaps with the exception of U.S. Series I Savings Bonds) there aren’t currently any safe options to keep pace with inflation. This doesn’t negate the benefits of closing the gap between what you’re currently earning and the increasing costs of living.
After determining a reasonable amount to keep in your checking account, the rest should be moved to a higher-interest alternative. I typically recommend keeping a couple months’ worth of expenses in checking to provide a buffer in case of any fluctuations in income as well as above average expenses. If you know a major expense is coming, you’ll want to keep a higher balance in checking as well. Assuming there’s an amount above what you need in checking, it’s time to seek higher yields.
You can start with your existing financial institution to see what savings or money market options they offer. Unfortunately, most institutions have been rather slow raising their rates so this may be a futile action. Pay attention to the actual rates and not the titles on the accounts. “High yield savings” does not always offer the best rates!
If you’re comfortable with online banking, I suggest looking at one of the online-only financial institutions which typically offer much higher rates. You can link the account with your existing bank account so you don’t have to change direct deposit or withdrawals. One resource to consider is which lists rates from a variety of banks. As an example, Ally Bank () is currently paying 1.85 percent for their Online Savings Account.
You may come across options paying significantly more (for example, 4 percent or more) but I recommend caution with anything that seems “to good to be true” as there might be restrictions on accessing your money or it might not offer FDIC insurance protection.
The first step to increasing your returns is to identify what you’re currently earning and comparing this to alternatives. An extra couple percent interest isn’t as exciting as buying the latest meme stock or cryptocurrency but if you’re goal is to gradually build wealth and maintain a strong financial foundation, it’s the right move today.