Americans are paid an extra $235 billion in interest by 2023, thanks to the Fed

Americans are paid an extra $235 billion in interest by 2023, thanks to the Fed

If you carry a lot of high-interest debt, the fact that the Federal Reserve once again did not cut interest rates at Wednesday’s meeting may be disappointing, if not surprising.

But the Fed’s reluctance to lower rates until it sees more consistent progress in inflation data has — and will continue to — put money in your pocket this year if you have savings and look for a federally insured account with the highest rate.

Frankly, “It’s a good time for savers,” said Greg McBride, Bankrate.com’s chief financial analyst.
In 2023, savers earned $315.4 billion in interest in deposit accounts, four times the $78.7 billion they earned in 2022, according to Lending Tree’s DepositAccounts.com, which used data from the Federal Deposit Insurance Corporation in its calculations.

That’s because, after several years of low interest rates, the Fed’s rate hike campaign starting in 2022 allows savers to earn inflation-beating returns on their US domestic deposits, including bank and credit union savings accounts, certificates of deposit. and money market accounts.

At the same time, yields on Treasury bills are also very competitive with the higher rates offered by banks and are also low risk.

If you want to grow your savings while growth is good, here are things to consider when weighing your options.

High yield savings account
The average interest rate on a regular bank savings account is about 0.5% but can run as low as 0.01% at the biggest banks.

In contrast, the average on high-yield savings accounts is more than 4%, according to DepositAccounts.com. And the best rates for high-yield accounts can be found at FDIC-insured online banks. How tall? Between 5% and 5.5%.

Let’s say you have $10,000 in savings. If you let it sit in a regular savings account at 0.5%, you’ll earn $50 in interest for a year. If you put it in a high-yielding 5% account, you’ll get $500.

A high-yield savings account is the best place to put the money you need to cover emergencies and expected big expenses you’ll need to pay in the next three months to a year.

As with any savings account, banks can lower the rate they offer — also known as APY — at any time. And you can bet they’ll do so when the Fed looks like it’s finally going to start cutting rates, McBride said.

Still, he added, since rates are likely to be cut in small increments, online high-yield savings accounts will continue to offer inflation-beating returns for the foreseeable future.

“They’re still going to offer the best way to preserve the purchasing power of your [money],” McBride said.
Money market accounts and money market funds
While money market deposit accounts and money market mutual funds both generate returns competitive with the best high-yield savings accounts, there are important differences.

A money market deposit account is a bank product. So, assuming your bank is FDIC insured, your account is too. (Or, if your account is at a federally supported credit union, your money will be insured by the National Credit Union Stock Insurance Fund.)

As with high-yield accounts, you may find the best deals at online banks. But money market accounts may have higher minimum deposit requirements than high yield accounts.

In contrast, money market funds are investment products — they generate returns by investing in short-term, low-risk debt instruments and currently yield an average of 5.13%, according to the Crane 100 Money Fund Index. Such funds are a good place to put your cash have in your brokerage account that you might want to use at some point to buy equities or bonds, says McBride. Money market funds are not FDIC insured, but any brokerage you use should be insured by the Securities Investor Protection Corporation, which protects your funds up to a limit if your brokerage ever suffers a loss.

Certificate of deposit
CDs are still a great place to put any money you can leave untouched for a fixed period of time — anywhere from a few months to five years.

If you need to withdraw money early, you can always get all of your principal back but may lose some of the interest earned as an early withdrawal penalty.

While your brick-and-mortar bank may offer CDs at good rates, you may be better off shopping around. Way the easiest way to do this without having to set up an additional account at another bank is to buy a CD through your online brokerage, which may offer a variety of CDs from many different banks.

On Schwab.com on Wednesday, the average rate for CDs offered in a range of maturities from three to six months was above 5.35%. Those aged between nine and 18 months were between 5.38% and 5.45%.

Long-term, two-year CDs average 5.4%, while three-year averages 5.25%.

Treasury bills and notes
Outside of deposit accounts, investing in short-term Treasury bills and notes has become another way to earn competitive returns without risk because Treasuries are backed by the full faith and credit of the United States.
The Fed announced big changes today. And no, we’re not talking about interest rates
Although the Fed said Wednesday it will slow the pace of its quantitative tightening program, which could have the effect of lowering Treasury yields, the easing is unlikely to have nearly as big an impact on short-term rates as the central bank’s guidance and actual results offer on its benchmark rate, Ben said. Bakkum, senior investment strategist at Betterment, a robo-advisory financial services firm.

Collin Martin, fixed income strategist at the Schwab Center for Financial Research, said “We don’t expect Treasury yields to drop much until it becomes clear that a Fed rate cut is coming, but the timing of a potential cut is pushed back given stronger-than-expected inflation. As long as the Fed keeps rates in the 5.25% to 5.5% range, we expect most Treasury bill yields to hover around 5.25% as well.”

As for Treasury notes, which have maturities between two and 10 years and are most sensitive to the Fed’s guidance on rates, Martin expects their yields to remain in the 4.5% to 5% range until there are signs of a possible rate cut, at which point they may fall modestly. , he said.

Like CDs, you have to invest money in Treasuries for a specific period of time – typically, a few months to a few years. Three- and six-month T-bills were yielding about 5.4% each on Wednesday, according to Schwab.com, while nine-month and one-year bills offered 5.32% and 5.23%, respectively. The two-year note is at 5.05%.

When deciding whether it makes sense to invest in CDs or Treasuries for the same period, you might choose Treasuries if you live in a high-tax state, McBride suggests, since interest on Treasuries is exempt from state and local taxes.

In all cases, the easiest way to buy Treasuries and other bonds is to do so through your brokerage account.