Savers, there was good news coming out from the Federal Reserve this week regarding interest rates. All signs point to an impending rate hike, which means that your hard-earned cash will finally begin to enjoy higher interest returns again. The main concerns now are, “When is the rate hike coming and how should I prepare for it?”
What the Fed said
Before we talk about what to do with your savings, take a quick glance at the two major focal points of this week’s Fed meeting.
- Quantitative easing (QE) to come to an end. For the past six years, the Fed has put the U.S. economy on its back by buying Treasury and mortgage bonds. The economic stimulus program is expected to come to an end after October.
- Rates to stay low for a “considerable time” after QE ends. Everyone hates the language used by the Fed because it is pretty much an open-ended time period.
Don’t worry, we still have a good idea of when a rate hike will come. According to rate projections of Fed board members, the majority believe a rate hike will come in 2015. Even banks have become more optimistic on when the rate change will arrive.
“After an internal debate this past month, we are pulling forward the first Fed rate hike from September to June next year. We still assume the Fed hikes at every other meeting for the first year and a half of the tightening cycle, but eventually, we expect rates to return to normal,” said Ethan S. Harris, global economist for Bank of America Merrill Lynch, in weekly economic report. “Normal” is considered to be a Fed funds rate of 3 to 4 percent. Right now, it’s at 0-0.25 percent. The Fed projects the rate to return to “normal” in 2017.
So, mid-2015 seems to be the expected time when a rate hike will come. Now, let’s talk about how to maneuver the changing rate environment.
Head to online banks for bigger savings
We get your savings concerns. You hate that savings rates are low. Meanwhile, you don’t want to be trapped with low CD rates when interest rates actually start to rise.
Yes, according to the banks tracked by MyBankTracker, the average savings rate is 0.27% APY. It’s the worst at big banks, where your savings rate is probably just 0.01% APY, or a penny for every $100 per year. You might as well close that account.
Instead, open an online savings account, which tend to offer the highest rates available nationwide.
Synchrony Bank, for instance, is offering 0.95% APY through its savings account, which requires just a $50 minimum balance to waive a 5% monthly fee. The online bank has a B+ rating on MyBankTracker for its great rates and stellar bank health.
Another great option is Ally Bank’s money market account. Currently, it offers a 0.85% APY. There’s no monthly fee or minimum balance requirement. You will receive unlimited paper checks and a debit card, which can be used to withdraw at any ATM for free (all fees are reimbursed). Ally Bank has an A+ rating on MyBankTracker due to its low fees, competitive rates and handy mobile banking features.
When rates do rise, savings rates at big banks will continue to pail in comparison to online banks. And, since savings rates move with the market, you’re always going to be earning better-than-average interest returns with an online savings account.
Sure, even with the high savings rates offered by online banks, the interest earnings may struggle to keep up with inflation right now. But, it is better than nothing. Right? Don’t let your money sit there earning pennies of interest — or even worse, nothing at all.
Open certificates of deposit (CDs) without fear
Interest-rate risk is a valid concern whenever CDs are involved. Since you’re locking your money at a certain rate for an extended period of time, you’re afraid that you’ll miss out on higher rates when rates begin to rise.
Frankly, the interest-rate hike that comes in 2015 will be very small and it will be unlikely to trigger a massive rise in CD rates.
Therefore, go right ahead and open the CD with highest rate available now. It’s much better than letting your money sit around doing nothing. Use MyBankTracker’s CD rate comparison page to help you with that decision.
If you are truly wary about significant rate hikes, you should open a bump-up CD. This type of CD usually offers one rate-increase — to be used you believe that the market rate is significantly higher. Ally Bank and CIT Bank are two popular online banks that offer bump-up CDs.
For example, Ally’s 2-year Raise Your Rate CD is 1.20% APY right now. If it jumps to 2.00% APY one year later, you can request that your CD balance earn the 2.00% APY, instead of 1.20% APY, for the remaining year left on the CD.
CIT Bank even offers its RampUp Plus CDs (available only in 1- and 2-year terms), which allow a one-time additional deposit and a one-time rate increase — for the times when rates rise quickly and you want to inject more cash to take advantage of those better rates. The online bank also has regular RampUp CDs (available in 3- and 4-year terms) that permit one-time rate increase. CIT Bank has an A+ rating on MyBankTracker because of its high rates and solid customer reviews.
Again, don’t let the fear of rate hikes deter you from saving now. Firstly, get that online savings account to maximize the interest return on your free cash. If do nothing else, at least do that.
If you want to earn a little more interest, open a CD without too much fear of rate hikes because those rate hikes will come small and slowly — you won’t miss out on too much interest in the short term.
Meanwhile, stay tuned to the Fed’s announcements. We’ll be doing that too and we’ll let you know when your strategy should change.