A positive effect of rising interest rates is that your savings now has the potential to earn something. The question is how you can take advantage of current rates.
You generally have three options for liquid (meaning you can get to it easily) savings. First are High Yield Savings Accounts (HYSA). These are offered by banks and provide a higher return than a regular savings account. There may be restrictions, such as minimum account size and a limit on the number of withdrawals per month. The easiest way to start a HYSA is to check with your current bank and see if they offer one. If not, you can check local banks and credit unions, or try an online source like bankrate.com.
Another option is a Money Market, offered by both banks and investment firms. Remember only banks offer FDIC protection for these accounts. A Money Market is a bit different than a savings account; it’s technically an investment product, with each share being one dollar. After the Financial Crisis of 2008-09, regulations limited the underlying investments in Money Markets to improve the safety of these funds. For most consumers, a Money Market works the same as a HYSA, although account minimums may be higher and there may be more restrictions on withdrawals.
The third option is a CD, or Certificate of Deposit. A bank will often offer a higher rate on a CD because you are agreeing to leave the money with them for a set period of time. If you remove the money before then, your principal is always yours, but they will adjust the interest credited to your account to the rate applicable for the length of time you had the CD.
Investing in a Money Market or purchasing a CD is the same process as a HYSA. Start with your bank, check local banks, and look online. Again, make certain the bank you choose has FDIC coverage.
If you are still building savings, you’re not alone. According to the Washington Post, over a third of Americans can’t meet an unexpected $400 expense. An easy way to build savings is to start small. Many people we work with start trying to save large amounts of money, and then feel as though they failed when they have to pull from savings. They didn’t fail, they just put too much into savings.
Ask your employer to split your paycheck and put five or ten dollars of every check into a separate savings account that you don’t see when you check balances online. After a few months, if you haven’t noticed the missing money, increase the amount going to savings, again by only five or ten dollars. If you get a raise, put part of the raise towards your savings account.
When an emergency happens, and you have to dip into savings, that’s okay. That’s why you have savings. Just work to rebuild it, so that it’s there for the next unexpected expense.
CovingtonAlsina is a Registered Investment Advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax or legal professional before implementing any strategy discussed herein. CovingtonAlsina does not provide tax or legal advice. Past performance is not indicative of future performance.