If you bank with a online institution, you may have received an email or message from your bank that the interest rate on your high-yield savings account is going up.
Why is this happening? We’ll explain why your savings account might be offering a higher interest rate than before.
The Federal Reserve is the central banking system in the US. It’s in charge of making decisions about monetary policy.
The Federal Reserve uses the federal funds rate — the interest rate banks use when lending money to each other — as a tool for regulating economic activity.
When the Federal Reserve raises the federal funds rate, it affects the interest rates of banking products like mortgages and savings accounts.
“The pros are if you’re a receiver, you can see higher rates on your high-yield savings. Now, if you’re a borrower, it’s costing more money to borrow, whether that’s a student loan, car loan, credit card, or mortgage,” says Marguerita Cheng, CFP® professional, RICP, and chief executive officer at Blue Ocean Global Wealth.
The interest rate on a high-yield savings account fluctuates and isn’t fixed. This means if you open an high-yield savings account, its normal to see the interest rate go up or down over time.
Savings interests are increasing as a result of recent decisions made by the Federal Reserve. The Federal Reserve has raised interest rates several times in 2022 to combat inflation.
“They’re tightening monetary policy,” explains Cheng. “A way to countermeasure the inflation is to have a tightening, and that means raising interest rates to make it more expensive for people to borrow money. It’s their primary mission to manage inflation without causing the economy into a serious recession.”
When the Federal Reserve raises rates, the interest rate on your savings account will generally go up. If the Federal Reserve lowers interest rates, savings interest rates will usually drop.
Most notably, high-yield savings accounts and online CDs are paying higher interest now than in 2021 or the beginning of 2022. The national average APY across all types of savings accounts has also slowly increased this year. According to FDIC, the average savings account pays 0.13% APY.
Quick tip: If your bank hasn’t offered a higher APY yet, or if it offers new customers a higher interest rate on a high-yield savings account, you may be able to contact your bank and ask for a rate increase.
Cheng says everyone — regardless of whether you’ve just graduated from high school or just retired — can use a combination of savings and investing for your short-term and long-term goals.
If you’re concerned about inflation, Cheng recommends saving just enough money for everyday needs or emergencies.
“We need cash for liquidity for any emergencies or opportunities,” says Cheng. “But you don’t want to have too much money in cash. Because you can see, even with high-yield savings, the growth rates on your cash is still below inflation. In other words, inflation is growing at a faster rate than your cash.”
A high-yield savings account can always be useful for short-term financial goals, like buying a car or saving money for a vacation. It may also be used for storing an emergency fund — financial experts recommend having at least three to six months of expenses easily accessible in an account.
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