Where to get the best return for your money in a rising interest rate environment

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When the Federal Reserve raised the target federal funds rate an additional 0.75 percentage points this month, it opened up new opportunities for savers to earn better returns on their money.

The Fed’s move is aimed at tackling high inflation, which has sent housing, food and energy costs skyrocketing.

The bad news for consumers is that their debts will become more expensive as interest rates on credit cards and other balances may rise.

But the good news is that savings returns will continue to rise.

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To date, the Federal Reserve has raised rates by a total of 3 percentage points this year, while also signaling that it will raise them by at least another percentage point by the end of the year. year, according to Greg McBride, chief financial analyst at Bankrate.com.

Further rate hikes could be on the way in 2023, depending on the path inflation takes.

It’s a great time to review where you’re putting your savings, McBride said.

“Interest rates are rising at the fastest rate in 40 years,” McBride said. “Even if you’ve never watched it, now is the time.”

Online savings accounts

September’s rate hike is already pushing up some online savings accounts.

Some interest rates are already at 3%, having started the year at 0.55%, and should continue to rise, according to McBride.

“We’re at levels we haven’t seen since 2009,” he said.

Notably, this interest rate growth is concentrated in online accounts, while physical bank savings haven’t budged much at all.

Among online savings accounts, larger providers tend to lag the Fed’s moves, while smaller providers tend to be more aggressive to hit 3%, according to senior industry analyst Ken Tumin. at LendingTree.

Credit unions, which also offer savings accounts, have also been more aggressive in keeping pace with the central bank’s rate hikes.

Financial institutions paying a rate of 3% include Direct savings in dollars and Quorumaccording to McBride.

Others who have already raised their rates include Indiana Merchant Bank and some accounts at Financial elementsa credit union also based in Indiana, according to Tumin.

Certificates of deposit

Meanwhile, certificates of deposit will allow you to lock in an interest rate for a fixed period of time called the maturity date, from six months to five years.

Yields for these products also climb to 3% across the maturity spectrum, McBride said.

“These 3% returns are the best we’ve seen in many years,” McBride said. “But they’re likely to go even higher, especially on the shorter maturities, one- and two-year CDs.”

The downside is that a CD rate that looks attractive now might not be as good six months from now if the Fed keeps raising interest rates, Tumin said.

To have more flexibility, savers may want to look for CDs with reduced or no withdrawal penalties, which can allow them to move their money around if more attractive yields become available elsewhere, Tumin said.

Some banks and credit unions offer complementary CDs, in which you invest a certain amount now at a certain interest rate and have the option of adding more money at a later date at the same rate of return.

Federal Naval Credit Unionfor example, has a 20-month CD with an add-on feature, according to Tumin, which requires a minimum deposit of $1,000.

Series I Bonds

As inflation hit historic highs, Series I bonds have become increasingly popular due to their ability to meet these higher costs.

Series I bonds currently offer an interest rate of 9.62%, which experts say is hard to beat elsewhere. This rate is to be reset in November based on the latest inflation data. It is expected to be north of 6%, according to Tumin.

I bonds are certainly worth considering in certain circumstances, but they are no substitute for a properly funded emergency savings account.

Greg McBride

Chief Financial Analyst at Bankrate.com

“If you buy in October, you’ll get six months of that 9.62%, and then another six months of probably something over 6%,” Tumin said.

But Series I bonds also have drawbacks. The money cannot be cashed out in the first year, and if you withdraw before five years, you lose three months of interest.

“I bonds are certainly worth considering in some circumstances, but they are no substitute for a properly funded emergency savings account,” McBride said.

When liquidity must be a priority

Surveys consistently show that building an adequate emergency fund is a challenge for many savers, and soaring prices have only made it harder for many people.

If you don’t have an emergency fund of at least three to six months worth of expenses, liquidity should be your first priority when it comes to saving money, McBride said.

In that case, online savings accounts are usually your best bet, he said.

If you’re just getting started, the good news is that a small goal, like $25 a week, can add up over time if you save regularly.

The key is to pay yourself first, McBride said, even if you’re also paying off credit card debt.

“It’s not just the 3% you earn in the savings account,” McBride said. “It’s also a buffer between you and 18% credit card debt when unexpected expenses arise.”