Your cash savings may get higher returns, but only with certain banks

Banks are starting to pay higher returns on cash. This is good news for depositors who have seen their reserves depleted by the dreaded combination of low interest rates and high inflation.

However, some banks are moving faster than others. Some, especially traditional brick-and-mortar stores, may not budge for a while.

At least 10 banks have increased interest rates on high-yield savings or money market accounts since mid-April, according to data compiled by Bankrate.

According to Bankrate, they include American Express National Bank, Barclays Bank, Capital One, CIT Bank, Colorado Federal Savings Bank, Discover Bank, Luana Savings Bank, Marcus by Goldman Sachs, Sallie Mae Bank, Includes TAB Bank. Several other companies have also posted yields in early 2022.

Interest rates are still relatively low and there are no payments above 1% yet. According to bank rate data, most are in the range of approximately 0.80% to 0.80%.

But the accounts with the highest yields pay 0.06%, about 10 times the national average, according to Greg McBride, chief financial analyst at Bankrate.

And consumer earnings could rise steadily as the Federal Reserve continues to raise benchmark interest rates to keep inflation in check. The central bank cut its interest rates to rock lows early in the Covid-19 pandemic to support the economy.

“High-yielding savings accounts could liquidate 2% later this year if the Fed gets aggressive as expected,” McBride said.

“It’s the only place in the financial world where you can get higher returns without increasing risk,” he added. “It’s pure gravy.”

Financial advisors often recommend savers to keep their emergency funds in this type of account. Your funds are safe (deposits are insured by the Federal Deposit Insurance Corporation) and liquid (you can always access them).

Savers should aim to have several months of household expenses on hand in case of job loss or other unforeseen events.

Winnie Sun, co-founder and financial advisor of Sun Group Wealth Partners in Irvine, Calif., saves at least six months on significant living expenses (shelter, food, and medicine), plus an extra for each child in the household. We recommend saving 3 months.

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Consumers don’t even need to move all their funds. By continuing to manage day-to-day cash management (such as checking accounts) at his current bank, he can avoid the hassle of switching and open a dedicated emergency fund account at the new bank, McBride said. says.

Not all banks are raising payments or raising them at the same pace.

In most cases, it was the online banking departments of online banks or brick-and-mortar brick-and-mortar banks that raised account rates (some banks did more than once in 2022).

McBride said they could take advantage of the lure of lower overhead costs and higher interest rates to compete with traditional stores who are “in no rush” to take the bulk of customer deposits and increase payments. .

Borrowing costs increase when the Federal Reserve raises the base interest rate (known as the federal funds rate). Loans become more expensive for consumers and businesses.

Banks make money on interest on loans. If the Federal Reserve raises the benchmark interest rate, banks will be able to earn more from paying higher loan rates and thus be able to pay a higher yield on their customers’ savings. There is a possibility

The central bank raised its benchmark interest rate by 0.5 percentage points on Wednesday. This is his biggest rise in over 20 years.

However, this seesaw effect may not apply to all institutions due to other factors. Banks use deposits to lend money to other customers. But in the early months of the pandemic, customers flooded the U.S. banking system with unprecedented amounts of cash. This was due in part to government payment streams such as cash hoarding and stimulus checks.

As a result, most banks may not realize the need to pay higher savings account interest rates to attract deposits and activate their lending machines.

Even with a handful of banks increasing payments, consumers are still struggling to keep up with inflation.

The main inflation indicator, the consumer price index, surged 8.5% year-on-year in March 2022, the fastest rise in 12 months since December 1981. As a result, money is losing value at a high rate.

CNBC Advisory Board member Sun said interest rates on high-yield savings accounts were “overall still well below inflation.

However, she added: [worry].”

Savers may choose different approaches to emergency savings, depending on their family circumstances, the Sun said.

For example, an individual who does not want to open another high-yield savings account at another bank could probably invest 5% to 10% (depending on their risk appetite) in a simple balanced fund split. You can reproduce these earnings in your emergency cash account. Between stocks and bonds, she said.

However, this investment involves market risk. In an emergency, savers use cash (rather than investment assets) whenever possible.

Individuals who don’t have the financial capacity to fund both an emergency savings account and a retirement account can also consider Roth’s personal retirement account, Sun said. In the event of an emergency, investors can use contributions to the Roth IRA as a last resort. (There is no tax penalty for doing so, but you may withdraw your investment returns in some cases, such as withdrawing before you turn 59½. Roth IRAs also have annual contribution limits.)