In an effort to reduce rising pandemic inflation, the Federal Reserve interest rates are rising for the first time since 2018. The 0.25% rate hike announced on March 16 comes as consumer prices have risen at its fastest pace in 40 years.
As a result, we may be entering a period of rising interest rates that we have not seen since 2006. Unlike in 2006, the current inflation rate is much higher and, unfortunately, inflation is eroding. the value of cash savings. Adding risky bets on stocks or bonds to reduce this erosion is not appropriate because the savings are intended for emergencies and short-term goals. However, there are steps to increase the performance of your savings without adding risk.
Here are four ways to protect your savings that are especially useful in today’s difficult and highly unpredictable environment.
Move your savings account to an online bank
The easiest way to earn more with your savings is to transfer your savings account to an online bank. Online savings accounts have higher interest rates than savings accounts at physical banks, and their rates have risen faster in a rising interest rate environment.
The last rate hike period occurred in 2017 and 2018. From December 2017 to December 2018, the Federal Reserve raised rates five times. In December 2017, the national savings account average, as documented by the Federal Deposit Insurance Corp., was 0.06%. The average online savings account was 1.29%, more than 21 times the national average. After the federal funds rate peaked in December 2018, the national average rose to 0.09%, while the average online savings account rose to 2.21%, almost 25 times the national average.
Today, the national savings account average is 0.06% and the average online savings account is 0.49%. Some of the best online savings account rates offered today are from Comenity Direct, the online division of Comenity Capital Bank (0.75%) and Ivy Bank, the online division of Cambridge Savings Bank (0 , 70%).
Make sure your online savings account remains competitive
If you already have an online savings account, make sure that it is not delayed as rates go up. During the pandemic, banks were dumped with deposits while demand for loans weakened. This caused banks to reduce their deposit rates to record levels. Many banks, even online banks, do not see their deposit and loan levels return to normal levels. As a result, deposit rates are likely to increase. Don’t assume that your online savings rate is still competitive – compare your rate with others, and if you’re overdue, switch to a more competitive savings account.
Another tactic used by some online banks as rates go up is to create new online savings accounts with competitive rates, while existing savings accounts have rates that stay low. Banks are promoting their new savings accounts to new customers, while existing customers are gaining less interest on old savings accounts. Check your account statements to review the competitiveness of the interest rate you’re earning. If you are not competitive, please contact your bank for other options. If they can’t offer a competitive price, move your funds to a more profitable savings account.
Supplement your savings with Series I savings vouchers
While you can earn more in an online savings account than in a savings bank at a physical bank, the best online savings account rates do not come close to the current high inflation rate.
The only risk-free savings product that will keep up with inflation is the Series I (Bond I) Savings Bond, which is available in the U.S. Treasury via the TreasuryDirect website. The bond rate I is indexed by the Consumer Price Index (CPI). The yield on the I bond includes a fixed rate that lasts for the life of the I bond (up to 30 years).
To the fixed rate is added the component of the inflation rate that changes every six months from the purchase of the I bond. New inflation rates of the I bonds are published every November and May, based on the increase in the ‘CPI for the previous six months. The current fixed rate is zero, so the total interest rate on today’s bond is equal to the component of the inflation rate, which is now 7.12% for bonds bought up to April 2022. As you can see, online savings account rates aren’t even. close to the type of bonds And today. This is likely to continue for another six months from May.
I-bonds can be used to increase the overall performance of your savings, but they are not suitable for all of your savings for two reasons. First, the Treasury limits the purchases of I bonds by a person through the TreasuryDirect website to $ 10,000 per calendar year. Second, after you buy a good I, you won’t be able to access the funds for a year. After one year, you can redeem the I bond, but there is a three-month early withdrawal penalty for the first five years after purchase. Because of these two factors, you don’t want to put your entire emergency fund in good and at the same time. Instead, the saver should slowly get his shares in I bonds.
Performance and safety
Your savings may not keep up with inflation, but steps can be taken to maximize your performance without adding risk. This can keep your savings safe and liquid, so you can rely on those savings when emergencies arise or when you’re ready to spend them on your short-term goals.
Ken Tumin is the founder of DepositAccounts.com of LendingTree, which has been tracking and rating savings, CD and current account offers from banks and credit unions for over a decade.
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