Savers have been waiting restlessly for this moment.
The Federal Reserve has been gradually hiking interest rates for the past few years, but it’s taken a while for deposit account holders to benefit. Now for the first time in a decade, online savings and money market accounts with the highest yields are ahead of inflation, says Greg McBride, CFA, Bankrate’s chief financial analyst.
During its December meeting, the central bank hiked its benchmark interest rate for the fourth time in 2018, bringing it to a range of 2.25 to 2.5 percent. The Fed also lowered its expectations for inflation, indicating that it’s expected to remain below its 2 percent target through 2019.
Nearly two dozen savings accounts available nationwide pay more than the rate of inflation. Currently, the top yield available to savers across the country is 2.5 percent APY.
The latest news from the Fed is worth considering, especially if you’ve been stuck in a low-yielding savings account or money market account. Shop around and pick an account that not only meets your needs but pays a high yield.
Interest rate hikes produce turbulence for stock market but do result in better returns for savers & investors looking for safe haven. For the 1st time in a decade, top-yielding online savings accounts & money markets are ahead of inflation – this rate hike helps keep it that way
— Greg McBride, CFA (@BankrateGreg) December 19, 2018
Gradually raising savings yields
Credit card holders tend to feel the effect of Fed rate hikes within one to two statement cycles. But savers have had to wait patiently for banks to boost yields.
Online banks have been steadily increasing their savings rates in recent months, but crossing the 2 percent threshold took time. The Fed has been raising short-term interest rates nearly every quarter since December 2015. But banks serving consumers nationwide didn’t start paying 2 percent APY until 2018.
Most of the biggest banks — and some smaller ones as well — still pay less than 1 percent APY. Banks flush with deposits haven’t needed to raise the yields they pay customers with savings and money market accounts.
Few consumers have taken advantage of the opportunity to earn more interest. In a recent survey, Bankrate found that 13 percent of respondents weren’t earning any interest at all. Just 6 percent were earning more than 2 percent APY.
Thinking beyond inflation
Beating inflation is a big deal for consumers. Inflation erodes your purchasing power, meaning that over time you’ll need more money to pay for goods and services as prices rise.
In addition to thinking about inflation, consumers should keep in mind that taxes can also reduce the value of their savings.
What’s key is not only beating inflation, but “beating inflation plus their tax rate,” says Lou Stanasolovich, founder and CEO of Legend Financial Advisors in Philadelphia.
“Beating inflation is called a real yield; beating inflation and taxes is a real, real yield,” Stanasolovich says. “That’s typically why any kind of savings vehicle — whether it’s a savings account, money market fund, CDs — usually are not good investments as a long-term type of investment. They are good for short-term money, meaning generally six months or less.”
In addition to comparing interest rates, savers should take other factors into consideration when looking for a new account for their emergency savings. Check to see whether there are any fees you may be expected to pay on a monthly basis and whether the bank or credit union has access to features that matter to you, like mobile check deposit and a highly-rated app. Make sure you’re putting your money into an account that’s insured by an entity like the Federal Deposit Insurance Corp. or the National Credit Union Administration.
Check the minimum balance you’ll need to maintain to qualify for the highest rate offer. And find out how often interest is compounded to see how quickly your savings will grow.