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The Federal Reserve has signaled that more interest rate hikes are coming this summer. That’s worrisome if you’re borrowing money. But if you’re a saver, it’s welcome news because it means earning more on the money you have parked at a bank.
Since the Great Recession, stockpiling money at a bank or credit union has almost felt like depositing your money in your mattress, given the minuscule interest rates financial institutions have been paying for funds in a checking or savings account.
Then high inflation hit. This had led the Fed to increase interest rates in an effort to dampen consumer demand and decrease inflation.
“For the last 2 1/2 years, interest rates went down, and then inflation went way up,” said Greg McBride, chief financial analyst at bankrate.com. “That’s the worst of both worlds for a saver. Now at least things are moving in the right direction. Interest rates are going up and the goal is to bring inflation down.”
If you’re following the advice to keep a healthy emergency fund, you might be wondering if you should break up with your bank for a higher rate on your savings. I talked to McBride about questions savers should consider if they are planning to move their money for a better return.
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Where should people search for high-paying savings accounts?
As of May, nationally available savings accounts were offering yields of just 0.8 percent to 1 percent, according to bankrate.com.
Many online banks have rates higher than the national average.
In a bankrate.com survey, LendingClub Bank, an online bank, was offering a 0.85 annual percentage yield (APY) with no minimum balance as of May 31. At that yield, an account with $25,000 would earn about $213, according to bankrate.com‘s simple savings calculator. A Bank of America savings account was offering 0.01 percent with a minimum balance of $100, or just $3 over 12 months, according to the survey.
“The banks already paying better yields are much more likely to remain competitive by increasing those payouts further as interest rates rise,” McBride said.
Can people trust putting their money in an online bank?
Technology has long transformed traditional banking. I do most of my banking on my mobile device. I pay bills, transfer funds and even deposit checks using my iPhone. I only need to visit an ATM about once a month for the few times I need to use cash.
If you’re going to use an online-only bank, just make sure the banking entity is insured by the Federal Deposit Insurance Corp. (FDIC).
If you’re comfortable with digital banking and looking to maximize every penny you can earn on the money you just plan on parking for a while, consider an online bank.
Is it really worth the effort to switch banks?
If you saved the suggested three to six months’ worth of living expenses as an emergency fund, keeping all that money in a low-interest-bearing account can be frustrating.
But you could spend a lot of time chasing relatively low rates. A difference of a few dollars may not be worth the effort.
“You could be driving yourself crazy, leapfrogging back and forth,” McBride said.
However, if your bank is paying next to nothing, it could be worth breaking up if you switch to a financial institution that is going to pay a much better yield and remain competitive as rates rise.
Is it too soon to switch banks?
The feds have just started to raise rates, so you may want to wait before breaking up with your bank.
On March 16, the Fed raised interest rates by a quarter of a percentage point. On May 4, the central bank raised rates by a half percentage point.
The Fed is expected to raise rates in June and again in July. Even so, it’s going to take a lot of rate hikes to get savings account yields up to significant levels, McBride said.
“The party is just getting started,” he said. “As the summer progresses, you’re going to see more and more of those savings accounts with yields over 1 percent.”
Changing your banking relationship is easier than it used to be, but it’s not without some coordination. If you have set up automatic bill paying, you’ll have to make sure to time a move just right to ensure everything is set up for the withdrawals.
You could also open an account to hold your rainy-day money while keeping open the account where you conduct your monthly household business.
Why shouldn’t people just invest their emergency funds?
When it comes to having a savings account for an emergency, it’s all about reducing risk.
Your rainy-day fund’s No. 1 job is to be there when you need it, and that means being liquid and easily accessible.
“You have to prioritize safety and access to the money,” McBride said. “Yes, you want to get the best yield you can get, but only without taking risks. Because when you need that money, the car breaks down or the water heater goes, not having access to cash often means paying a very high price.”
Michelle Singletary is a personal finance columnist for The Washington Post. Her column runs on Sunday.