Finding a competitive interest rate on your emergency savings has become even more difficult amid record-high inflation.
But that’s good news. The Federal Reserve is expected to begin raising interest rates. When they do, it increases the interest you can earn on your cash.
Some accounts may be ready to see those gains first.
“Online savings accounts that currently pay competitive yields are likely to be the ones that stay competitive as interest rates rise,” said Greg McBride, chief financial analyst at Bankrate.com. .
“You want to be where the banks have paid a premium to get your money,” he said.
That’s when government data on inflation continues to set records.
A key inflation measure tracked by the Federal Reserve – core CPI for personal consumption – up 4.9% in December from the previous year, the fastest increase since September 1983. Consumer price index for January up 7.5% compared with a year ago, another record was reached since February 1982.
However, savers who want better cash rates should be patient.
It will be some time before the gap between the Federal Reserve’s 2% inflation target and the savings rate narrows.
Many online savings accounts are currently around 0.50%, according to Bank rate.
McBride said it will take longer than 2022 to close the gap between inflation and interest rates.
As that transition happens, where you keep your emergency cash will matter more.
Why online accounts stand out
One advantage of online savings accounts is the flexibility they offer. Ken Tumin, founder and editor of Depositaccounts.com.
Rates offered by traditional banks are often lower than the national average annual percentage yield 0.05%.
When choosing an online savings account, it’s important to double-check to make sure it’s a reputable financial institution. Also, be sure to check with the Federal Deposit Insurance Corporation, or FDIC, whose insurance will usually cover you for deposits up to $250,000.
An online savings account is often the best place to earn the money you need in a year or two, says Tumin. If your timeframe is longer, you may find better returns on your money elsewhere.
More options to choose from
Savings Bonds Phase I is attracting a lot of attention today because of the interest rate they pay, which is now the original rate is 7.12%.
But there are limitations. Investors can only purchase up to $10,000 of the bond per calendar year.
Furthermore, you can’t withdraw money in the first year. And if you withdraw your money before five years, you lose three months of interest, McBride said.
The interest rate you earn can also change every six months.
“It’s great to supplement your emergency fund with an I-bond, but you probably shouldn’t rely entirely on an I-bond for your emergency fund,” says Tumin.
You don’t want to be locked into a time when rates are rising.
Greg McBride
Chief Financial Analyst at Bankrate.com
Certificates of deposit, or CDs, can provide a higher interest rate on your savings. In general, the longer the term, the better the interest rate. But that would require you to lock up your money for a specified amount of time, which won’t benefit when the Fed raises interest rates.
“You don’t want to be locked in at a time when rates are going up,” says McBride. “It’s like standing on the platform and watching the train go by.”
Financial experts often recommend the savings features of Roth individual retirement accounts, which allow you to invest your money after taxes for retirement and take your contributions (not earnings) at any time. without being taxed or penalized.
But there are reasons emergency savers should be careful with those, too.
Usually, you can’t put the money you withdraw from a Roth IRA back into your account due to annual contribution limits.
“It’s better to just put your retirement money and emergency savings in a dedicated emergency savings account,” says McBride.
