The Federal Reserve has raised the federal funds rate several times in 2022 and has said additional bumps are likely. These changes are designed to wrestle inflation down to manageable levels, but they have ripple effects in other areas of the economy — with mortgage rates and credit card interest rates heading up and the stock market moving in the other direction.
The good news for consumers is that the interest rates in savings accounts usually go up when the Fed raises rates, which means more money in their pockets. If rates do rise, 4 in 5 American consumers plan to take action according to a new IHowBlog online survey conducted in April 2022 by The Harris Poll. Popular actions they plan to make include sending more money to their savings account and switching banks if they can find a good rate.
You might be ready to make a move, too. Put yourself in a position to make it a smart one by doing these five things.
1. Be patient
Current top interest rates in savings accounts are better than this January’s rates, but not by the same margin found in mortgage rate increases. Why? One commonly cited reason is that banks are already flush with more than $18 trillion in deposits, nearly 30% more than in March 2020, according to the Federal Reserve. Because higher interest rates would likely spur even more deposits, there isn’t a strong incentive for banks to raise rates quickly. Even if the pace is slow, expect interest rates on most savings accounts to continue climbing as interest rates overall rise.
2. Understand your options
There are many types of savings accounts. High-yield savings accounts typically have better interest rates than traditional savings accounts, though a common trade-off is limited or no brick-and-mortar locations.
You might also see good rates on money market accounts or if you buy a certificate of deposit, or CD. However, if you need frequent access to your funds, these might not be a good fit.
3. Do your research
For starters, check out all the rates offered in your area and online. Before you open a new account, scope out details beyond the interest rate. Monthly fees, high account minimums or fine print that reveals a sign-up bonus is too good to be true are reasons to pump the brakes.
Finally, compare any new rate to your current rate. For example, a rate of 1% is great if your current rate is 0.05%. But if your rate is already 0.8%, the benefits might not outweigh the hassle of switching. If your account balance is $2,500, for example, finding a rate that’s 0.25% higher will result in an additional $7 per year.
4. Plan for your cash needs
Online-only banks often have good interest rates, but depositing and withdrawing cash can be difficult. If you deposit or withdraw cash frequently, the higher rate might not be worth it.
However, if it still makes sense to switch, you’ll need a plan. One option is to make cash deposits in another checking or savings account at a bank that does have in-person services and transfer it to the savings account with higher interest.
For withdrawals, you could transfer money back to the account that has in-person services. Or, you could use an ATM. If you do, make sure you won’t be charged fees by your bank or by the ATM; fees from a single transaction could wipe out the equivalent of months of interest.
5. Get rid of other debt
Having your money make even more money just by sitting in an account is an appealing idea. But reducing debt can have a much bigger impact on your overall finances than finding a savings account with a higher interest rate. Before you research interest rates, first make a plan to reduce credit card debt or repay or refinance student loans.