Higher interest rates mean borrowing becomes more expensive. But on the flip side, your savings account can earn more. Interest rates have increased in 2023 and aren’t likely to come down until 2024. See what that means for your savings account and learn how you can capitalize on a high interest rate.
What Savings Interest Rates Have Done in 2023
We’ve seen savings rates go up in 2023. The Federal Reserve has increased interest rates to fight rising inflation since March 2022, with four rate hikes so far this year. We came into 2023 with a 4.25% to 4.5% federal funds rate. The current interest rate range is 5.25% to 5.5% following the September and November meetings where the Federal Reserve held rates steady.
As the Federal Reserve increases interest rates, the rates for mortgages, personal loans, credit cards and savings accounts increase.
“The Federal Reserve, as part of the central bank’s responsibility to fight off inflation, raised interest rates at a fast pace over the last year,” says Deri Freeman, a certified financial planner with Prudential. “While it does make it more expensive to borrow money for large purchases such as a home or a car, we see the benefit come through in interest savings rates for cash.”
[Read: Best Savings Accounts.]
Savings Rate Predictions
At its September and November meetings, the Federal Reserve opted to hold rates steady. Meeting notes indicate the Federal Reserve plans to maintain interest rates unless inflation picks back up.
Freeman says that while no one can say with absolute certainty, many experts expect to see interest rates come down in 2024. “Rates could begin to drop slowly at some point next year but it’s anyone’s guess,” she says.
[See: Best High-Yield Savings Accounts]
Strategies for Maximizing Savings Rates
You can earn more from your savings account when interest rates are high. It’s a good time to take advantage by finding savings accounts and certificates of deposit with the highest annual percentage yields.
Also watch for bank account bonuses, which can pay hundreds of dollars when you open new eligible savings accounts. You’ll need to keep the account open, make a qualifying deposit and maintain a minimum balance for a specified period to earn the bonus.
CDs
Certificates of deposit generally offer higher interest rates than savings accounts because you are committing to put aside your money for a set period of time. You’ll need to leave money in your account for a year if you open a one-year CD. This allows you to lock in an interest rate, so it will stay the same even if market rates drop.
One option is to build a CD ladder by staggering maturity dates. A simple CD ladder might involve opening a one-year CD every month for a year. That can help you take advantage of high savings rates now and potentially rising rates in the near future while still maintaining access to your funds as the CDs mature.
Money Market Accounts
A money market account is a savings account that offers check-writing abilities. Shop around to maximize your savings rates. Online-only banks will likely offer the highest APYs. These companies don’t have the substantial overhead costs of traditional brick-and-mortar banks so they can offer more competitive interest rates.
Savings Accounts
To get the maximum APY, look for high-yield savings accounts offered by digital banks, says money coach and certified financial planner Ohan Kayikchyan. However, be sure to read the fine print on savings rates. Bonus rates, also known as introductory or teaser rates, are often an incentive to open a new account but may reset after a certain period. Also, find out if there’s a balance requirement to get the advertised rate.
Freeman also recommends checking with credit unions that have high-yield savings rates. Like online banks, credit unions often have lower overhead than larger financial institutions and may be able to offer more competitive rates.
Checking Accounts
You don’t typically use a checking account for savings — instead it’s the hub from which you pay bills and receive paychecks. There are still opportunities to maximize your APY with your checking account. More and more banks and credit unions are offering checking accounts that earn interest.
But before you open a new account, turn to your current bank. If you have money in a savings account you’re thinking about moving to a bank with a higher savings rate, talk to your bank. “Ask your current bank what they can do for you to keep your relationship and not move your money to a competitor,” says Kayikchyan.
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Savings Interest Rate Forecast originally appeared on usnews.com
Update 12/07/23: This story was published at an earlier date and has been updated with new information.
