The Federal Reserve has raised its benchmark interest rate faster this year than it has in decades. This has prompted many banks to raise their deposit rates.
However, not all banks have been increasing rates. The nationwide savings account average yield as documented by the FDIC has only increased from 0.06% to 0.13% this year. Online banks have generally been more responsive to rising interest rates. This year, the online savings account average yield has increased from 0.46% to 1.36%.
In today’s rising rate environment, it can pay to move your cash. Here are four tips on finding the best places to park your cash.
Open a savings account at a well-established online bank
The easiest way to earn more on your cash is to move your savings account to an online bank, which operates without branches. If you’re new to online banks, open an online savings account at a well-established bank rather than a new online bank.
Even though they don’t offer rates as high as those at new online banks, the well-established online banks still have much higher rates than brick-and-mortar banks, and their account opening and account management capabilities can make you feel more comfortable. In addition, they have long histories of keeping their rates competitive with other online banks.
Open a savings account at a rate-leading online bank
Once you have a savings account at a well-established online bank, it’s easy to shop around for rate-leading savings accounts. Small and new online banks are typically the rate leaders. As rates have been rising, these rate leaders have been offering savings account rates 50 to 100 basis points higher than the rates of the well-established online banks.
These new online banks are safe, but their account features and customer service are often weak. As an example, several new online banks have small limits on their electronic transfer services, making it difficult to deposit or withdraw large amounts. By having a savings account at a well-established online bank first, you can use their electronic transfer service to make large deposits and withdrawals into a savings account that you establish at one of these new online banks.
Look for online banks that offer no-penalty CDs
No-penalty CDs can help boost your overall interest earnings of your savings with very little loss of liquidity. Like a regular CD, a no-penalty CD has a fixed rate that lasts for a certain term, such as one year. Unlike a regular CD, you are allowed to withdraw all of the principal and accrued interest without a penalty anytime after the first six days of account opening.
Several online banks now offer no-penalty CDs, and they can boost your earnings above what you can earn with just the savings account. Opening a no-penalty CD at the same bank where you have your savings account is most convenient. This helps account opening, and when you decide to close the no-penalty CD, it makes it easy to quickly move the funds back into your savings account.
There is one important consideration with no-penalty CDs when rates are rising fast. You should monitor rates so you can close the no-penalty CD if the savings account or new no-penalty CDs have higher rates.
Look for top-rate CDs with mild early withdrawal penalties
CDs may seem unattractive when rates are rising, but eventually, rates will fall. It’s hard to predict when rates will fall, so it makes sense to consider some top-rate CDs to boost your overall interest earnings. Top-rate CDs can have rates 150 to 250 basis points higher than online savings account rates.
If rates rise more than expected, resulting in online savings account rates surpassing your CD rate, a mild early withdrawal penalty can make it worthwhile to close the CD and move the funds into a higher-rate account. Even in that case, your total earnings after the penalty could top what you would have earned by just keeping the funds in an online savings account.
The best early withdrawal penalties are 90 days of interest or less for terms under two years and 180 days of interest or less for terms of two years and longer. Also, the best early withdrawal penalties only take from accrued interest. They don’t take from the principal. This is important if you close the CD early into its term, in which case, you’ll just lose all accrued interest without losing any of your principal.
When rates are rising, it’s necessary to monitor deposit rates and move your money to benefit the most. The right combination of online savings accounts and CDs at banks can offer the highest return on your cash while keeping it safe.
Ken Tumin is founder of DepositAccounts.com by LendingTree, which has been tracking and rating the savings, CD and checking account offerings of banks and credit unions for more than a decade.
