Time and compound interest are among the best wealth-building aids.
That makes it all the more important to ensure your savings are earning as much interest as possible now that interest rates are finally rising again.
I’ve increased the return on my own savings by 413 percent by doing just that.
How to tell if your interest rate is competitive
Before you can ensure your savings are earning as much interest as possible, you need to know what your money is currently earning and what other banks are currently paying.
If you don’t know how much your savings account is earning, check your latest statement or log into your account online and look for the annual percentage yield (APY).
For other banks’ current interest rates, consult a free online resource like Money Talks News’ bank account search tool. Check only the “Savings/Money Market” box if you want to limit the search results to those types of accounts. You can also use the tool to search for rates on interest-bearing checking accounts and certificates of deposit.
The fastest way to earn more on your savings
For folks who have yet to switch to an online bank, the fastest way to get a higher interest rate for your savings is to leave a big brick-and-mortar bank for a competitive online bank.
My spouse and I did this about two years ago.
We moved our savings account from a major national bank that was giving us an annual percentage yield (APY) of about 0.3 percent, to an online bank that was offering an APY of about 1 percent at that time. So, right there we more than tripled our rate of return.
Then, as the Federal Reserve continued to increase the federal funds rate, we saw our return rate climb faster at the online bank.
Today, the old bank is paying 0.4 percent on the same type of account we had there. Meanwhile, the online bank is paying 1.65 percent for savings accounts with our balance. So, we are now earning about 413 percent more interest than we would be getting today if we had not switched banks.
This is typical of online banks. They generally pay higher interest rates because they have lower overhead costs than traditional banks. They also tend to be quicker to raise their interest rates after the Federal Reserve raises the federal funds rate. To learn more, check out “Why It’s Time to Consider Internet Banks.”
What the federal funds rate means for your savings
The federal funds rate helps drive up the interest rates that banks pay on accounts like savings accounts. But you need not understand the fine details of this mechanism to capitalize on it.
As far as it concerns your money that is sitting in the bank, all you need to understand is that:
- The Fed has been raising the federal funds rate since December 2015. And the Fed is only expected to continue raising it.
- Interest-bearing bank accounts such as savings accounts tend to pay increasingly higher interest rates over time as the federal funds rate rises.
In other words, if you make sure your savings are earning as much interest as possible now, they will likely earn increasingly higher interest rates as time and Fed rate hikes go on.
What’s your take on savings account rates these days? Share your thoughts below or on our Facebook page.