As you may have heard in the news, interest rates have increased significantly since the beginning of 2022. At the root of these interest rate increases is the “Federal (or Fed) Funds” rate, which is the interest rate at which banks lend money to other banks. The graph below shows the Fed Funds rate since 2010, and as you can see, the rate has increased significantly from about 0% to over 5% over the last 1.5 years.
While this rapid increase in the Fed Funds rate means you’ll likely pay a much higher interest rate on a mortgage for a home or a loan to purchase a vehicle, there are also a number of potential benefits that go along with higher interest rates.
High-Yield FDIC-Insured Savings Accounts
A couple of years ago, you likely couldn’t find a savings account paying more than 0.5% interest per year. Now, because of interest rates increasing, some banks are paying 4% or more. These savings accounts that consistently offer high rates relative to other accounts are often referred to as “high-yield” savings accounts. They can be compared to rates at large local banks like US Bank, which pays 0.01% on their savings accounts. Many local banks also charge monthly service fees unless certain criteria are met.
Moving money to one of these accounts enables you to start earning additional interest on savings for relatively little effort while also not taking on any additional risk, as long as the account is FDIC-insured. FDIC insurance is guaranteed government protection of up to $250,000 per bank for individual accounts and up to $500,000 per bank for joint accounts. The coverage is per bank, so opening multiple accounts (including different types of accounts like savings accounts and Certificates of Deposit) doesn’t increase FDIC coverage.
Interest rates, and therefore savings account rates, change over time and may go up or down, but currently you can earn significantly more in interest by moving dollars to a high-yield savings account. For example, if you have $20,000 in a savings account paying 4.0%, you will earn $800 per year. With the same amount of money in a bank account paying 0.01%, you would only earn $20.
Certificates of Deposit (CDs)
Certificates of Deposit (CDs) are another great way to get additional interest on your savings. The major distinction between savings accounts and CDs is that CDs require you to keep the money in the CD throughout the CD term. Thus, your money is typically tied up and can’t be accessed prior to the end of the term without incurring penalties. CD terms typically range anywhere from 3 months to as long as 5 years. The benefit of CDs is that they typically offer higher interest rates compared to savings accounts and the interest rate is locked for the term of the CD, even if interest rates on savings accounts were to go down.
Because the money is tied up for the term of the CD, it’s essential that you only put money into CDs that you are confident you won’t need during the CD’s term. CDs are typically FDIC-insured just like savings accounts, but it’s recommended that you confirm this is the case with any CD before opening.
While a lot of people bemoan rising interest rates, if you have a plan for your money it could actually be beneficial for you. If you don’t have a plan yet and are interested in developing one, we would love to help. Schedule a free introductory call today where we can get to know you better and determine how best we can serve you.
About Guide Financial Planning
Guide Financial Planning is led by founder Ben Wacek, who is a Christian fee-only Certified Financial Planner™ and Certified Kingdom Advisor®. He has a passion to help people of all income levels make wise financial decisions and steward their resources from an eternal perspective using Biblical principles. Based in Minneapolis, MN, he works with clients both locally and virtually throughout the country and abroad. You can follow the links to learn more about Guide Financial Planning and our team and the services we offer.