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By Tim Maxwell
/ CBS News
While inflation has started to cool down, it remains at higher levels. In an effort to curb inflation, the Federal Reserve aggressively increased interest rates over the past 17 months, making products like credit cards, personal loans and mortgages more costly.
However, the news isn't all bad. While higher interest rates make borrowing more expensive, it has also increased yields on savings vehicles like high-yield savings accounts and certificates of deposit (CDs). That's good news for savers who may be looking for ways to grow their money with less risk.
Check your savings and CD account options here now to see how much more you could be earning!
Where you should put your money in 2023
Not sure what savings vehicles might benefit you the most? Let's examine the options and see what financial experts recommend.
High-yield savings accounts
High-yield savings accounts have been growing in popularity ever since the Fed began its current rate hike cycle. As its name suggests, high-yield savings accounts offer an annual percentage yield (APY) significantly higher than a traditional savings account.
According to the most current data from the FDIC, the average rate for savings accounts is 0.42%, but this figure doesn't include high-yield savings accounts. However, when you shop and compare savings yields online, you'll likely see yields ranging from 4.30% to 5.50%. Without the overhead of brick-and-mortar offices to maintain, these online financial institutions can offer APYs several times higher than the national average.
"My advice is to use [high-yield savings accounts] for your emergency fund or short-term savings goals," says James Allen, a certified public accountant and founder of Billpin. "They offer a higher interest rate than a regular savings account and are still easily accessible."
Learn more about your high-yield savings account options here now.
Certificate of deposit accounts
Another savings option earning higher rates is CDs, which guarantees a specific rate of return when you leave your money in an account for a set term, usually ranging from one month to five years.
CDs can be an excellent option if you anticipate interest rates may decrease since the rate is locked once you open the account. However, if you pull your money before the end of the term, you'll likely incur an early withdrawal fee, usually in the form of lost interest. For example, the fee for withdrawing money early from a Chase CD of two years or longer is 365 days of interest on the withdrawn amount. However, this fee will not exceed the total interest earned during the current term of the CD.
"When depositing your earnings into a CD, it's crucial to double-check that the duration will not interfere with major life events you may need funds for, such as your retirement or your children's college tuition," advises Chad Willardson, founder and certified financial fiduciary at Pacific Capital.
Get started with a CD here!
Money market accounts
Money market accounts offer more flexibility than high-yield savings accounts and CDs because they combine the features of both checking and savings accounts. They pay interest like a savings account but often allow you to write checks and withdraw money from ATMs like a checking account.
These accounts usually offer a substantially higher interest rate than traditional checking and savings accounts, but unlike CDs, you can access your funds without incurring an early withdrawal penalty. You can open a money market account at traditional banks and credit unions or with many online banks.
If you're considering opening a money market account, make sure you understand the bank's minimum balance requirements. As Allen points out, "They often require a higher minimum balance. If you can't maintain that balance, you might be better off with a high-yield savings account."
Other favorable places to stash your cash
Besides these savings deposit options, you can also grow your money in a safe way with U.S. Treasuries, "which are paying rates higher than we've seen in a very long time," says Willardson. "This allows for money to be kept in a secure place without the worry of bank stability, which has been a top-of-mind concern for investors this year."
Annuities are another valuable savings tool that offers structured payments and potential tax benefits. "If you are nearing retirement, you may want to consider multi-year guaranteed annuities," advises Paul Tyler, CMO of Nassau Financial Group in Hartford, Connecticut. "They typically offer higher rates than banks and many times offer ways to access part of your funds early without penalty. The tradeoff is that they may require a longer holding period."
The bottom line
Choosing the right place to grow your savings, such as high-yield savings accounts, CDs or money market accounts, depends on your financial needs and goals. If you value flexibility, a high-yield savings account or money market account may benefit you, while a CD might be a better option if you want a fixed interest rate and can commit your money for a set time. Before you sign up for an account, carefully consider the interest rates, fees and liquidity so you can make the best choice for your unique situation.
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As an avid finance enthusiast with a deep understanding of economic trends and monetary policies, I've closely followed the developments in the financial landscape, including the recent actions taken by the Federal Reserve to combat inflation. The Federal Reserve's decision to aggressively increase interest rates over the past 17 months has undoubtedly left a significant impact on various financial products, as mentioned in the article by Tim Maxwell on CBS News.
The author correctly highlights the consequences of these interest rate hikes, particularly the increased cost of borrowing for products like credit cards, personal loans, and mortgages. This aligns with the economic principle that higher interest rates generally lead to higher borrowing costs. The move, aimed at curbing inflation, has created a nuanced financial environment where both challenges and opportunities coexist.
One notable positive outcome is the boost in yields on savings vehicles such as high-yield savings accounts and certificates of deposit (CDs). The article suggests that, despite the higher costs of borrowing, individuals can benefit from the increased interest rates on savings. Let's delve into the concepts mentioned in the article:
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High-Yield Savings Accounts:
- The article emphasizes the popularity of high-yield savings accounts since the Federal Reserve initiated its rate hike cycle. High-yield savings accounts offer a significantly higher Annual Percentage Yield (APY) compared to traditional savings accounts, with figures ranging from 4.30% to 5.50%, as per online comparisons.
- The author, James Allen, a certified public accountant, recommends using high-yield savings accounts for emergency funds or short-term savings goals due to their higher interest rates and easy accessibility.
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Certificate of Deposit (CD) Accounts:
- CDs are highlighted as another savings option with higher rates, offering a specific rate of return for a set term, typically ranging from one month to five years.
- The article advises caution regarding early withdrawals from CDs, as they may incur fees, such as the example of a Chase CD where the fee for early withdrawal is 365 days of interest on the withdrawn amount.
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Money Market Accounts:
- Money market accounts are presented as a flexible option, combining features of checking and savings accounts. They offer higher interest rates than traditional accounts and allow check-writing and ATM withdrawals without early withdrawal penalties.
- The author suggests considering the minimum balance requirements of money market accounts, as they may be higher than those of high-yield savings accounts.
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Other Savings Options:
- U.S. Treasuries are mentioned as a safe way to grow money, offering rates higher than seen in a long time. This is positioned as a secure alternative to traditional banking.
- Annuities are introduced as a valuable savings tool, especially for those nearing retirement. Multi-year guaranteed annuities are recommended for their higher rates compared to banks, along with potential early access to funds without penalties.
In conclusion, the article provides a comprehensive overview of various savings options in the current financial landscape, considering the impact of interest rate hikes by the Federal Reserve. It emphasizes the importance of choosing the right savings vehicle based on individual financial needs, goals, and risk tolerance, taking into account factors such as interest rates, fees, and liquidity.
