By Barbara O’Neill, Ph.D., CFP®, AFC®
Martie Gillen, Ph.D., MBA, AFC®, CFLE
The Federal Reserve raised interest rates for the ninth time in March 2023, bringing the federal funds rate to between 4.75% to 5%. Higher Fed rates, designed to combat high inflation, raised interest charged on loans and variable-rate credit cards but also provided an opportunity for savers to earn higher interest on deposits after more than a decade of low-interest rates.
Unfortunately, many large “brick and mortar” financial institutions have kept interest rates on checking, savings and money market accounts low instead of keeping pace with Federal Reserve rate increases. As a result, the average savings account interest rate in late March 2023 was just 0.23% versus interest rates between 3.5% and 4%+ available from competitive online banks.
Savers forego interest-earning potential when they keep savings deposits in low-yield accounts. Collectively, Americans are losing billions of dollars in interest annually by not using higher-interest savings products such as online bank accounts, certificates of deposit (CDs), money market mutual funds, and U.S savings bonds.
Personal Financial Managers may receive questions from service members about moving money to earn higher interest. Below are some key decision-making factors to consider.
Hassle Factors- Some people fear high interest rates will soon go away so opening a new account is “not worth the hassle.” In reality, FDIC-insured accounts with online banks can be opened in less than five minutes. In addition, with compound interest, interest losses due to interest rate disparities grow over time.
Desire For Face Time– Some people value a local bank/credit union representative at a branch office and may hesitate to open an account online. Banking does not have to be either/or. Depositors can use a “brick and mortar” institution for checking and an online bank for high-yield savings.
Deposit Insurance– Bank savings and money market accounts and CDs are FDIC-insured for $250,000 per depositor per account ownership category. Similar insurance for credit unions is provided by NCUA coverage. Money placed in money market mutual funds is insured for up to $500,000 by SIPC if a brokerage firm fails.
Liquidity Concerns– Some savers avoid moving money to CDs to preserve liquidity and not “tie up their money.” To alleviate this concern, CDs can be laddered with staggered maturity dates to increase liquidity and hedge future interest rate changes. U.S. savings bonds can be cashed in after one year, although three months of interest is lost before five years.
The takeaway message for service members is that it pays to shop around to earn higher interest on savings. The higher the dollar amount in a savings account, the higher the payoff for doing so.
For additional information about changed interest rates, review the OneOp 2022 Personal Finance Year in Review webinar.
Photo by Micheile Henderson on unsplash