The Federal Reserve raised the federal funds rate again today in a vote that surprised few people.
It marks the third hike of the year — and the eighth since the Fed started increasing its benchmark rate again less than three years ago.
With the federal funds rate now in a range between 2 percent and 2.25 percent, there’s a lot you can and should do to minimize the amount of interest you pay on debts, as we detailed after the past rate hike in June. Interest rates on most types of debt will only go higher if the Fed continues hiking rates, as many experts expect.
If you’ve already secured the best possible mortgage rate and are otherwise debt-free, however, today’s Fed vote is another story. It represents an opportunity to earn more money on your cash savings while barely lifting a finger.
Not so long ago, 1 percent was considered a great return. But now, it’s easy to find returns well north of 2 percent — with some banks inching ever closer to the magic 3 percent mark.
As the Fed has continued to raise the federal funds rate, competitive institutions such as online banks have been paying increasingly higher interest rates.
Earned interest is passive income — the best kind. To seize that extra cash, all you have to do is find the best interest-bearing account for you and park your money there.
Finding the best savings account and CD rates
The fastest way to do this research is to let a free online resource like Money Talks News’ account comparison tool do it for you.
You tell it your state, opening deposit amount and how long you’re willing to let that cash sit. The tool will then spit out a list of high-paying accounts.
Looking for a certificate of deposit? The comparison tool tells me you can earn a big, fat annual percentage yield (APY) of 2.5 percent on a 12-month CD over at Sallie Mae Bank. There are no monthly fees, and the minimum opening deposit and minimum balance are $2,500.
If you drop $10,000 in that account, you’ll be looking at $253 in effectively free money one year later, assuming the bank compounds daily. I used the U.S. Securities and Exchange Commission’s compound interest calculator to compute that in seconds, by the way.
Prefer the flexibility of a money market savings account? MTN’s comparison tool tells me you can still earn an APY of 1.85 percent over at CIT Bank. Moreover, there’s no monthly maintenance fee, and the minimum opening deposit is only $100.
Choosing a bank account
While an online tool can identify high-paying accounts for you, it can’t tell you what type of savings vehicle is best for you. Only you can determine whether a CD, savings account or money market account suits you best right now.
Don’t worry. This isn’t hard, either. Just think about your financial needs and goals — specifically, how much interest you want to generate and how much access you need to your cash while it’s earning a high yield.
Interest and access are the main differences between a CD and a savings account, which includes money market accounts.
CDs generally pay the highest interest rates, but the trade-off is that they are also the most restrictive.
You must be prepared to avoid touching your savings at all for a predetermined time period, which could be as short as three months or as long as three years. You will usually incur a penalty if you withdraw funds from a CD before the predetermined time period expires.
Money market accounts generally pay lower interest rates than CDs but offer the most flexibility. You can withdraw money up to six times per month without incurring a penalty, according to the U.S. Consumer Financial Protection Bureau.
How are you capitalizing on Fed rate hikes? Share with us by commenting below or over on Facebook.