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How to make more money with your savings now that banks are raising interest rates

2022-09-25T17:10:52.505Z

The Federal Reserve raised its key interest rate five times this year to curb inflation. This opens an unexpected opportunity to get some extra money.



By Rob

Wile

The Federal Reserve has raised its key interest rate five times this year, most recently on Wednesday, as part of its ongoing effort to curb the pace of inflation.

The idea is that since the US central bank is making it more expensive to borrow money, demand for goods and services will fall, driving prices down.

One side effect of rising interest rates is that banks can increase the amount of money they pay to consumers who put some of their dollars into savings accounts.

Because banks earn more on the money they lend, those same institutions can offer higher returns to their customers.

Think of the virtuous cycle of the loan and savings relationship that banks have with their customers.

But until recently, the interest earned on savings accounts hasn't been all that impressive.

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Because banks, like Capital One, earn more on the money they lend, they can offer higher returns to customers. Bloomberg/Bloomberg via Getty Images

“All interest rates are down quite a bit from previous decades,” Bankrate.com chief financial analyst Greg McBride said in an email.

Until this year, McBride said, interest rates had fallen for most of the 40 years — and so had the amount of money banks pay into those accounts.

“If you go back to the early 1980s, the Federal Reserve funds rate, Treasury yields and mortgage rates were in the double digits,” he said.

“In 1990, the Federal Reserve funds rate was over 8%, Treasury yields were between 7% and 9%, and mortgage rates were 10%.”

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“In 2020, the Fed funds rate was close to zero, Treasury yields were below 2%, and mortgage rates were 2.5% to 3%,” he added.

Now that these rates are going up again, money costs more.

But that means there is an opportunity to get a higher return on deposits.

McBride advises clients to shop among different banks to get the best return on their savings.

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Not all banks have significantly increased their interest rates for savings accounts.

According to the Federal Deposit Insurance Corp., the national average interest rate on savings accounts is 0.17%.

These low interest rates on savings deposits recently caught the attention of lawmakers on Capitol Hill, who pressed CEOs of big banks last week to explain why they weren't raising rates. 

"As rates continue to rise, we would expect to continue to raise the rates we pay customers," Wells Fargo CEO Charlie Scharf said in testimony to Congress on Thursday. 

Some financial institutions, especially those that are Internet-only and have no branches, have traditionally advertised higher interest rates with their high-yield savings account products.

Some of these banks offer more than 1% or 2%, and in some rare cases more than 3% on savings accounts, according to NerdWallet representative Chanelle Bessette.

Bessette said online banks have less overhead than brick-and-mortar branches, and they also must do more to compete for deposits.

Both Bankrate and NerdWallet offer lists of institutions that are currently offering the highest returns.

Among them are Discover, Capital One, American Express Savings and Marcus by Goldman Sachs.

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McBride, chief financial analyst at Bankrate.com, said it's easy to sign up for one of those accounts, even if you do your primary banking elsewhere.

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“You can open a savings account online with just a few minutes of your time, and link it to your current financial institution's checking account to move money back and forth seamlessly,” he said.

"If your bank has put out a new savings account with a higher yield than the one you currently have, all you have to do is walk up and ask to have your money transferred to the new higher yield account."

In some cases, banks aren't making it clear to existing customers that they can now get a higher return on savings, McBride said.

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"We're seeing some scams where banks launch a new savings account that offers an attractive return, while existing account holders stay in the original account at the original rate," McBride said in an email.

“It is quite easy to switch to the new account, but you have to take action to make it happen, the bank is not going to knock on your door with that opportunity,” he added.

Source: telemundo

All news articles on 2022-09-25

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