Savings Accounts Are Finally Paying Decent Rates

Higher interest rates mean earning more on your savings.

When I first opened a high-yield savings account at the end of 2019, Discover was paying 1.7% on deposits. I thought that was pretty decent. But over the next several months, as the COVID-19 pandemic arrived and the Federal Reserve began slashing interest rates in an effort to prop up the failing economy, the yield began to drop. By early to mid-2021, the interest rate had fallen to 0.4%.

But then inflation happened. And after a period of hoping it would quickly abate, the Fed began raising rates in March 2022, taking them from almost 0% to 4.50% - 4.75% today.

In what is perhaps one of the only silver linings of this inflation we’ve experienced over the past almost two years, banks are raising their rates on savings accounts and CDs. You can now get rates around 3.5% or even close to 5% on your cash. Savings products have just started catching up over the past few months, and with the Fed still determined to cut inflation, rates are likely to increase even more.

It’s finally a good time to be a saver.

Why This is Good News

People have plenty of reasons to put their money into cash savings as opposed to investing it; building an emergency fund, saving up for a trip, buying a home, getting married, starting a family and other life events.

If you aim to save up to six months’ worth of expenses in an emergency fund, this could mean keeping up to $20,000 or more in cash. That’s a lot of money to just be sitting uninvested. Investing this money in stocks or even bonds carries the risk that once an emergency shows up, your investments will have dropped in value and take some time to recover. Emergency funds need to be liquid and free of volatility risk.

The obvious benefit to higher savings account rates is that your money is working a little bit harder. If you’re going to keep so much money in cash, at least you can now earn something off of it.

How to Find Good Rates

First things first, if you want to get higher interest rates on savings accounts and CDs, you need to ditch your brick-and-mortar bank. These institutions aren’t in the business of paying customers for their deposits. Online banks, on the other hand, stay competitive with interest rates, partly due to their lower operations costs.

You also need to make sure the account you use is FDIC-insured. There are lots of cash management accounts out there that look like banks but aren’t. If an account is paying an unusually high interest rate, you might not be dealing with the same level of safety.

If you’re looking for a place to park your money for a short-term goal or if you just want some flexibility, a savings account will be the best choice.

Savings accounts from Discover and Ally are currently offering 3.5% and 3.6% respectively. Marcus by Goldman Sachs pays 3.75%. CIT Bank offers the highest out of major online banks at 4.05%. Some lesser-known banks pay even higher if you’re willing to shop around.

If your goal is a little bit farther out, let’s say you want to buy a home within 5 years, CD rates have also increased. Unlike a savings account, CDs lock up your money for a period of time. The benefit is that you can often get a higher yield.

For example, 18-month CDs at Discover pay 4.75% while you can lock in a 4.3% rate for three years or 4.1% for 5 years. Ally offers an 18-month CD paying 5%. And lesser-known banks are paying even more than that with various terms.

Locking in a CD rate now may allow you to earn a higher return than inflation if the Fed is successful in bringing it down. However, there is a downside to locking in a rate now when the Fed will continue hiking for the foreseeable future. You may lock in a 5-year CD paying 4.25% now and in another few months that same CD could be paying 5%.

These numbers are bound to fluctuate after the date of this post. But consider this a snapshot to show what’s possible if you’re looking for new places to put your cash and earn a little extra yield.

The Downside to Higher Interest Rates

Higher interest rates have a downside, of course. While you get paid more in interest on your savings, you also pay with higher interest rates for a mortgage, car loans, credit cards and more.

It’s now more expensive to buy a home. The current 30-year mortgage rate is around 7% compared to below 3% in 2021. Paying more in interest over the life of a loan means a high mortgage payment. We may not see such low rates again anytime soon, so anyone looking to buy a home now needs to grapple with yet another obstacle.

Higher interest rates also have the potential to hurt the economy. That is in essence what the Fed is trying to do. By increasing interest rates, and thus the cost of borrowing, the Fed hopes to reduce consumer demand to lower the rate of inflation. There is some debate about whether the economy will get a hard landing or a soft landing. That remains to be seen, but higher interest rates do carry the risk of recession.

Move Your Money for Higher Yield

You won’t get these higher rates by staying with a big brick-and-mortar bank like Chase, Bank of America or Wells Fargo. If your savings are in a place that isn’t paying a decent interest rate, it’s long past time to move your money. Online banks will give you the highest consistent rates while giving you the same level of safety. They also tend to have slicker interfaces and more user-friendly apps. Vote with your feet by choosing better banks.

You should avoid moving money too frequently just for a slightly higher rate. The reality is that 3.5% won’t pay you that much more than 3.6%, and rates will continue increasing, so the minute you move your money there may be a slightly higher rate elsewhere. Find a good bank that pays consistently high rates and is likely to increase yields as interest rates rise as a whole.

Saving doesn’t feel like such a waste anymore, and that’s great news for just about everyone.