Interest Rates on the Rise
With interest rates on the move, due to the Fed’s latest rate hike, there are winners and losers galore. One of the areas we haven’t paid much attention to for years is our savings accounts. For most of us we have been beaten into submission, simply accepting the laughable interest we’ve been getting. If you’ve been with a traditional bank the savings interest rate has been, well insulting. Believe Wells Fargo was paying .01% on some of their savings accounts. Not even picking on them, as this has become the norm across most brick-and-mortar banks.
So, what’s changed and what to do?
What has changed is with the Fed’s announcement of a .25% rate increase (and likely 6 more this year for the Fed) Fund Rates banks will have to adjust to keep up. Of course, lending rates will increase as well, but the big winner here is your cash savings rates. Generally speaking, when the Fed increases their rates, banks in lockstep will increase what they are paying to park money at their bank.
Essentially, it is exactly the outcome the Fed is hoping for to quell inflation. More incentive to leave your money in banks and less to take it out and spend in the open market.
Now, if you have your typical 3-6 months (or more) sitting in cash these dollars can be a real amount. I’d argue, so much so, you want to optimize the return on this investment. Sure, you can leave it earning .01%, but why? Wouldn’t you rather capitalize on earning more? Especially, if inflation continues at its current 7% rate every dollar that sits earning nothing is ACTUALLY losing 7% in spending power. Let me be clear though, I don’t see you ever having a savings account that will keep up with inflation per se. That said, if we can be smart with these dollars, we can at very least eat into what inflation is doing to our spending power.
What to do, what to do, what to do? Well, you came to the right place as I have some pretty strong thoughts here. For starters, don’t simply accept the interest rate being provided to you by your normal brick and mortar bank. They are great at a lot of things, generally though savings accounts aren’t one of them. Instead, start looking at online-only banks or savings accounts. A few that come to mind are Liveoak Bank, Marcus, Ally, Capital 360 to name a few. The way these banks work is there is no branch office, which is generally one of the reasons their interest rates seem too good to be true.
For instance, Liveoak Bank is paying .6% today vs. the .01% of Wells Fargo. What does this translate to? On $100,000 at Liveoak, you’d earn $600 a year vs. $10 a year earning .01% elsewhere. Could you use an extra $590 this year? If not do me this favor. Move your money there and call me up. I have plenty of people that willingly will take you up on those funds. Additionally, as interest rates increase the gap usually will get larger. I wouldn’t be shocked by year-end to see this rate be well over 1% APY.
Can you trust these banks?
An online bank may sound scary to some, so can they be trusted? The answer is – absolutely, yes. They are FDIC insured the same way your deposits at a more traditional bank would be (up to $250,000 per account registration). In addition, almost everyone I know has online banking, so any concern of security would be the same regardless of the type of bank you are leaving your money at.
How do they work?
Generally, how these online banks work is you create an account online. From there you will connect it to your outside checking account. They will then make a small deposit of like a penny or two to confirm the connection. From there it is as easy as apple pie. You can just initiate a transfer of funds to and from your accounts as you wish. That said there are three disclaimers I want you to be aware of:
- Transfer time may take an extra day or two vs. an internal transfer you are used to.
- There is usually a limit to the amount of transfers a month. Not usually a problem, but be aware of it.
- Some of the banks will give you a teaser rate, so beware. They’ll say something like 1% rate then in small print it will say something like for your first three months.
If you keep to the accounts I mentioned, most of them I’ve seen and or heard good things about. If you venture outside, which there are plenty of good accounts out there, simply read the fine print.
Dollar saved is a dollar earned.
As Ben Franklin said, “a penny saved is a penny earned”. In some cases, the additional earnings aren’t groundbreaking and in others, they can be sizeable. The point is, things are on the move, and accepting the status quo shouldn’t be acceptable. Rather, keep your ear to the ground and we will do our best to communicate major changes as we hear about them.
As always stay wealthy, healthy, and happy.
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