The past few years have been brutal for savers who want a return on their money. Interest rates have been incredibly low, averaging 0.06% for savings nationwide. Long gone are the days of fintech companies competing with each other for customers by offering higher and higher savings account APRs.
But this year, we know the Federal Reserve may raise interest rates a few times, potentially starting in March. Consumer banks base their rates for products like loans, credit cards, savings accounts and CDs on the Fed's — when the Fed raises rates, so do banks.
Even if the Fed boosts its benchmark rate, it'll take a while to see that reflected in your bank account. The reason is simple: Savers stashed away so much money during the coronavirus pandemic that banks don't need to compete for our dollars anymore — they have enough.
In fact, the interest rate on your savings may not rise at all this calendar year. That's especially painful for all of us feeling the effects of inflation on our budgets. In fact, we're more likely to experience the negative impact of higher rates — meaning borrowing money from a bank will cost more — than the positive. That could compound the inflation strain.
Your best bet for the highest rate is still at online banks — less overhead means they can offer a bit more for your deposit than the typical brick-and-mortar institution, according to Bankrate. Ally, Discover and Goldman Sachs are all currently offering savings accounts with a 0.5% APY. It's not a lot, but it's at least higher than the 0.06% national average.
Aside from that, there are some CDs that might offer higher rates, but you won't be able to touch your money for six months to several years, depending on the terms, without incurring a penalty. That might not be worth it to you when the offered interest rates still only hover around 1%.
Investing is another potential hedge against inflation. Returns are never guaranteed, but there is the potential for higher gains than you can get otherwise. If you won't need the money for, say, more than five years, then investing can be smart.
That said, it's not a spot for your emergency savings — recent market volatility shows why you don't want all of your money tied up in a riskier investment — which you'll want in an FDIC-insured savings account.
Currently, my emergency fund is sitting in the same savings account I've had since I graduated from college. It's not earning much, but that's OK. Low rates aren't forever, and I know it's secure.
