Not too long ago searching for high interest on your savings was an exercise in futility. Rates hit rock bottom during the Great Recession as the Federal Reserve took drastic steps to restart the economy. Thirty year mortgage rates dipped into the threes, while new cars were available with no interest loans. High interest savings and short-term CDs usually weren’t paying more than one percent.
If you’ve borrowed money in the last 18 months, you know that the financial world has changed with the Fed’s steady march of tightening. You’re lucky to find a mortgage below 5 percent, while average credit card interest is above 17 percent according to CreditCards.com. Being a borrower is now a little more painful.
The flip side of that coin is that savers can now earn a modest return. But you still have to work at it. If you’re banking with one of the massive banks, you’re settling for less than you deserve. According to Bankrate.com, many major banks pay a scant .01 percent on savings.
This means if you have funds on deposit with these institutions, you are charging mere hundredths of percent of interest, while they lend your dollars at a rate 100 times higher. No wonder they are so profitable! Local banks and credit unions aren’t much better than this. Except for some limited time offers or those rife with caveats, most local institutions have rates pretty close to those of the mega banks.
My recommendation to you: stop lending them money! You’re not running a charity with a bank as a beneficiary. Save your philanthropic instincts for those organizations that really deserve them. Investigate the options below to earn a reasonable return on your savings.
Online Savings. The simplest first step is to use an FDIC guaranteed online savings account that’s linked to your current checking account. Bankrate.com lists updated rates for online banks including Barclays, Marcus, and CapitalOne that pay close to 2 percent on savings. They work with your checking account through online transfers. If you need access to your funds, it takes about three days for the transfer to be made back to checking.
Sweep Accounts and Money Markets. One well kept secret of the brokerage industry is that while wonderful deals are offered on trades and other transactions, they are counterbalanced with poor rates paid on so-called sweep accounts where cash is held. Sweep accounts are those in your investment accounts that hold cash that’s not otherwise invested. While the rates do exceed the paltry ones paid by the mega banks, with an average interest rate of .25 percent most brokerage firms are borrowing your money for a song.
To improve your interest rate, it may be a simple as finding a better sweep account at your chosen investment firm. They may put barriers in place on getting better rates on your money. You may need to manually purchase the higher interest rate money market funds instead of depending on the default sweep account paying a lower rate.
Watch Out for Come-Ons. Some banks and credit unions punish you for your thrift. It’s hard to believe that with some accounts that the more you deposit, the lower your rate of interest. It may be that it pays a superior rate, but just for a limited time. You want to automate your savings success by having your funds at a financial institution that rewards your thrift by keeping your interest rate high regardless of how much you deposit, and doesn’t lower your earnings after an initial period.
CDs. Rates on certificates of deposit have increased along with those on savings accounts. When you find a good rate at an online savings bank, you’ll find competitive CDs from that same institution. In a rising interest rate environment, these certificates are best used if to “match liabilities.” This means if you will require access to funds at a certain time, such as a planned major purchase or supporting secure cash flow in retirement, then a ladder of CDs with differing maturities can be a wonderful solution. If you don’t have that need, it may make sense to keep your cash in online savings so you can participate in the continuing march of the Fed’s projected interest rate increases.