Interest Rate Hikes Have Begun. Here’s How to Position Your Savings

After a long lull in desirable rates, it’s time for a refresher: What should savers be considering when there are forecasts of higher yields?

A chart showing rising rate

It’s been a while since savers have witnessed a meaningful upward climb in the interest rates they earn on deposits held in financial institutions. The U.S. Federal Reserve, which has tremendous influence over prevailing interest rates, has positioned them at historic lows for the past couple of years as part of its efforts to prop up the American economy amid the Covid-19 pandemic. Many financial institutions have in turn offered interest rates on savings products well below 1%; in fact, as recently as December 2021, the average interest rate for a savings account was 0.06%, as tracked by the Federal Deposit Insurance Corp. Other factors — including a glut of cash deposits flowing into banks in the wake of government stimulus programs — also contributed to the low rate environment.

But in the final months of 2021 and in early 2022, the Fed indicated that it may back off the measures it has followed that have held rates at near-zero levels. And in mid-March the Fed made good on its signals: The Fed announced that the Federal Funds rate is increasing by 0.25%, from 0.25% to 0.50%. Again, this benchmark rate has been kept at historic lows for years. This is the first upward bump since 2018.

The prospect of a rising interest rate environment raises important questions for savers: What’s the right strategy for me to navigate the interest rate tailwinds that are expected over the coming months? And how can I capitalize on the opportunity for higher yield?

Check out the following tips for navigating a rising interest rate environment.

Use high-yield savings and money market accounts to hold cash that must remain accessible, like your emergency fund

In a rising interest rate environment, it’s possible that financial institutions will begin to dial up the APY (annual percentage yield) they offer on their deposit products in order to keep those products competitive and in step with broader market conditions.

Savers who park their cash in a savings product like a money market account (also known as a money market deposit account) can benefit from these rate hikes because this type of product tends to offer an interest rate that fluctuates when there are underlying shifts in interest rates across the broader economic landscape.

A money market account — as well as a high-yield savings account — isn’t likely to impose limits on deposits or withdrawals, so they offer a high degree of liquidity. For holding cash you don’t expect to need for day-to-day spending, this savings vehicle makes a lot of sense.

But this leads to the next key point…

Don’t be complacent with whatever your current bank is offering. It pays to shop around for savings products

When interest rates rise, it’s more attractive for banks to lend out money. But to do that, they need inflows of cash — or deposits coming from savers like you. Increased competition among banks, as mentioned before, can lead to the introduction of new and more attractive savings products. Savers who have defaulted to adopting whatever savings products their local bank offers should pause to consider exploring online savings accounts, which may offer much more competitive rates.

A marketplace for high-yield savings products like SaveBetter enables savers to choose from a wider variety of products offered by a wider selection of banks. And a rising rate environment is a time when savers want, and should seek, out maximum choice.

Leverage a mix of short- and long-duration CDs to manage cash reserves

Predicting what the Fed will do to interest rates, and when, is a popular pastime that leads to many wrong guesses. But the broad consensus is that in 2022 there are likely going to be multiple rate hikes succeeding the initial bump that was announced in mid-March.

So what to do with deeper cash reserves, i.e., money that can be put to work in a less liquid savings product?

Savers may well wonder if the rates available on certificates of deposit (CDs) will improve over the remainder of the year, leading some to forgo this product category — which restricts access to funds for a fixed term — under the assumption that more attractive rates are just over the horizon and therefore worth waiting for. Just remember, it remains to be seen how and to what extent banks will react, if at all, to potential changes to Fed rates, as seen in their deposit product offerings.

Savers in this predicament, where future rates are subject to change, are pondering what is known as reinvestment risk. (Interest rate FOMO, if you will.) But there are methods of deploying CDs that can help you earn pleasing returns while avoiding the Fear-Of-Missing-Out feeling that you passed on better rates.

The CD ladder. This savings strategy has you purchase CD products with equal funds in incrementally longer durations. Imagine splitting $4,000 into $1,000 parcels and buying four CDs at 1-, 2-, 3-, and 4-year terms; or at 3- 6-, 9-, and 12-month terms. This approach gives you regular access to a portion of your funds — i.e., on the CD maturity date — at which time you can reassess the interest rate environment.

You can roll the cash in the shortest-duration CD into a long-duration (and usually higher-earning) CD — i.e., buy a 4-year CD with the proceeds of the 1-year CD when it matures — and not affect the regularity of access to funds. This is one of the key benefits of a CD ladder.

The CD bullet. This is considered the inverse of the CD ladder strategy. Instead of dividing and parking a large sum across multiple CDs at once, the bullet strategy suggests putting a portion of your nest egg in a long-duration CD — say, a fifth of your funds in a 5-year term — and, after a year, buying a 4-year CD with another fifth of your cash reserves, and so on. In four years, you invest the last fifth of your funds in a 1-year CD. This way, all your CDs mature together, at the end of five years.

If you expect rates to continually rise over time, this allows you to take advantage of the upswing as it plays out. Savers sometimes employ the CD bullet if they have a big expense they’re saving for down the road, like college tuition.

The CD barbell. With the CD barbell strategy, savers split their nest egg into two larger parcels, and buy two CDs at a shorter and a longer duration, like two years and five years. This allows a saver to reconsider their outlook after two years and adjust how half their cash reserves are invested.

SaveBetter can help you find competitive interest rates in a changing interest rate environment

SaveBetter lets you put your cash savings to work by giving you access to a curated network of banks and savings products, including high-yield savings accounts, money market accounts and CDs — all through one, unified login. Explore savings products available through SaveBetter.

All participating banks on the SaveBetter platform are FDIC insured, so you can rest easy knowing your deposits are protected up to the limits of federal law. And with SaveBetter, you don’t have to worry about charges eating into your savings — there are no fees to enroll.

As choice becomes increasingly important as interest rates tick up, SaveBetter can help give you the options to make the right calls when it comes to your savings — from an always-growing inventory of competitive products, to a diverse selection of banks with missions that reflect your values.

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APY means Annual Percentage Yield. APY is accurate as of May 12, 2022. Interest rate may change after initial deposit. Minimum opening deposit is $1.00.

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