Amid the blizzard of news coming out of Washington, D.C. these days, you might have missed an important update: The Federal Reserve just raised interest rates again.
For anyone with significant savings parked in a bank, that’s welcome news, especially if you’re making next to nothing on your cash. With just a little bit of effort, you can lock in an interest rate as high as 2.5%.
“For the first time in more than a decade you can earn a return on your savings accounts that keeps pace with inflation,” says Greg McBride, chief financial analyst at bankrate.com.
There’s one catch: Not all banks are offering high yields. “You can’t just sit around and wait for those higher interest rates to land in your lap. You have to go out and get them,” says McBride. Here’s how.
Where to find the best savings rates
No matter where you’ve kept your cash, you haven’t been able to earn much on your safe savings for years; after the financial crisis, the Fed left short-term interest rates near zero to help boost economic growth.
But in late 2015, the Fed reversed course and started raising the federal funds rate, the benchmark that determines what you earn on savings and money market accounts and certificates of deposit. The late September hike puts this key interest rate at 2.25%.
Banks that operate only online have been raising savings rates along with the Fed, while more traditional banks with lots of local branches—called “brick and mortar” in the industry lingo—haven’t budged much.
Right now, with less than $25,000 in a savings account, you’ll earn 0.04% to 0.06% in interest at Bank of America, Chase, Citibank, and Wells Fargo.
How switching can pay off
Let’s say you have $15,000 in savings. If the account pays 0.05%, you’re on pace to earn $7.50 in interest this year. Move that money to an online bank paying 2%, and you could earn around 40 times as much.
“If the economy continues on a similar path we should see more Fed rate hikes in 2019,” says McBride. Move your money to an online bank that offers a top interest rate today, and chances are it will continue to adjust its rates higher as the Fed makes more moves.
There’s no need to worry about the safety of your money. Online banks offer Federal Deposit Insurance Corp (FDIC) protection—up to $250,000 per account—just like an old-school bank. You can use the FDIC’s free online calculator to confirm that any bank is backed by the FDIC.
The bonus for locking in your money
Online banks are also the place to find the best certificates of deposit. The average interest rate on a 1-year CD rate is below 0.50%. Ally bank pays 2.5% on a 1-year CD—five times the average—and Barclays pays 2.45%.
McBride suggests sticking with short-term CDs for now. “There’s not that much difference in the yield you are paid for a 1-year CD and a 3-year CD. If you put your money in the one-year you have the flexibility to reinvest it in a year, at what will likely be higher rates.”
Remember that if you withdraw your money before the term ends, you’ll pay a penalty, typically a few months of interest.
Why you might want to keep your old bank too
If you already have your paycheck or retirement account withdrawals coming into your brick and mortar bank as a direct deposit, and you’ve got all sorts of bills on auto-pay, there’s no need to undo all that.
Keep using your traditional bank account for deposits and bills. Then earn a nice payoff by using an online bank for your savings. You can link to your existing checking account and easily zap money between the two accounts.
Keep in mind that transfers can take a day or two. That’s easy to plan around, and in the meantime you can—finally—earn a decent yield on your safe savings.