How to Maximize Your Savings When Interest Rates Rise

by | Nov 29, 2022 | Wealth Management

Rising interest rates are at the center of practically every economic discussion right now. In an effort to fight off high inflation, the Federal Reserve has raised interest rates several times— often by a full 75 basis points.

That target federal funds rate, established by the Federal Reserve eight times a year, determines how expensive it is for banks to borrow money from one another or lend money out overnight. And that cost impacts the interest rates your savings accounts can earn, the Certified Deposit (CD) rates, and indirectly, the rate you pay on your credit card or when you borrow money for a car or home.

As of November 2022, the target federal funds rate rose to a range of 3.75% to 4%. And while this number is significantly higher than the federal funds rate of just 0.38% in 2020, it’s nowhere near the rate the Federal Reserve set in the early 2000’s (closer to 6.5%) or the record-setting rate of nearly 20% in 1980. That means we may have a long way to go before the Federal Reserve reverses course.

Looking forward, the Federal Reserve is expected to continue raising the target federal funds range into 2023. That’s less-than-great news for the stock market. But if you’ve got cash set aside in savings accounts for short-term or long-term use down the road, this isn’t all bad news.

By the way, are you making one of these four major savings mistakes? Saving alone isn’t enough— in this economy, you have to save smart. 

The rising federal funds rate comes with some economic consequences

But it has also created unique savings opportunities.

As the target federal funds rate rises, banks earn more money for lending out their funds. And when you save cash in savings accounts or through another savings instrument, you benefit from that increased income too. Over time, you’ll likely notice a small increase in the interest rates your bank offers for a variety of savings options, including regular savings accounts, high yield savings accounts, CDs, and other savings instruments.

Especially in times of volatility, these savings options can become favorable alternatives or supplements to your investing strategy.

The Federal Reserve may raise the federal funds rate in an instant, but the impact to your savings accounts isn’t immediate

Every bank and provider has the power to determine its own lending and savings interest rates. So don’t be surprised if savings account interest rates, bond yields, and CD rates climb a bit more slowly than the federal funds rate. Because these products aren’t pegged to the Federal Reserve’s rate, their movements are at individual banks’ discretion.

That being said, we’re already seeing some banks and financial institutions offering interest rates of 3% or more on money market and high yield savings accounts. And while traditional brick and mortar banks are sometimes slower to adjust their savings account rates, online banks tend to offer higher yields for their online savings accounts— giving savers who don’t mind opting for a virtual banking experience even more opportunities to benefit from rising interest rates.

Aside from savings accounts, treasury bonds offer another way to protect your emergency fund from high inflation. As of November, the 1-year Treasury Yield sits at 4.7%— the highest it’s been since 2000. We’re even seeing some tax-free bonds (those issued by cities and local governments) with interest rates as high as 5-6%, or more.

If you have excess cash on hand, these savings options offer a way to protect your wallet from inflation

When it comes to investing in stocks, we typically advise against investing money you’re going to need again soon. The risk of needing that money while the market is at a suboptimal level— then having to sell at a loss— is just too high.

But CDs and bonds are different. There are several savings instruments like these that only tie up your cash for a few months, a year, or a couple of years. If you’re setting aside cash to buy a home or car in the next 1-2 years, for example, saving your money in the form of bonds yields a much higher rate of return than letting that money sit in a regular savings account where it doesn’t benefit from high interest rates, and inflation erodes its value.

If you have savings you don’t expect to need for 10+ years, but don’t want to invest it, 10-year bonds can offer similarly high returns with less risk than stocks.

Just a few years ago, it really didn’t matter whether you saved cash in a checking account, savings account, or bonds. The yield rates across the board were fairly equal— and equally low. But today, there’s a significant difference in how your money grows based on where you store it. And without a savings plan in place, you could be missing out on notable earnings!

At Cook Wealth, we’re continually looking for ways to help our clients maximize every market opportunity

We watch stocks, funds, and interest rates daily, constantly monitoring every aspect of the market. Our proactive approach to helping you manage your financial plan means you get the best timely advice, in both good times and volatile ones.

We also keep an eye on the tax implications of every investment and savings decision, because our joint tax and financial planning team understand building wealth is a two-part process: Investing smart and keeping what you earn.

When you’re ready to talk to a financial advisor and start strategizing your cash, Cook Wealth is here to help you live life empowered.