Banks Aren’t Keeping Up with Interest Rates—What Should You Do?

Inflation is high, but the interest rate that your savings account earns probably isn’t. In fact, it’s probably much lower than the inflation rate. Even the Federal Reserve’s increases in the fed funds rate probably haven’t budged your bank’s payout by much, especially if you hold your cash at a brick-and-mortar institution.

If you’re like many people, you’re wondering what you can do with your savings to help offset inflation’s eroding effects. Read on for some options that are likely to pay more than the meager interest rate your savings account is giving you.

Series I Savings Bonds

Series I bonds, also called I bonds, offer a rate of 9.62% for bonds issued between May 1 and October 31, 2022. Why so high? Because Series I bonds earn both a:

• Fixed rate of interest

• Rate that changes with inflation

Many investors and savers find I bonds attractive given the high inflation rate.

What else do you need to know? The U.S. government issues these securities through the teasurydirect.gov website. You can invest as little as $25 and as much as $10,000 per year.

Be aware that you can’t cash in I bonds for 12 months and will lose the last three months of interest if you redeem within five years. Also, the rate they pay will drop once inflation falls. Still, they may be a good short-term investment if your time horizon is at least five years out.

Check out our “Investing in I Bonds” article for in-depth coverage of what they are, how they work, and whether they may be right for you.

In addition, consider investing in short-term Treasury bills, which are yielding 3-4%. You can buy bills for terms ranging from four to 52 weeks. Bills are sold at par (face value) or at a discount, and you can sell them before they mature or at maturity, when you are paid face value.

Finally, you can consider purchasing Treasury bonds. The government sells Treasury bonds for 20- and 30-year terms and pays a fixed interest rate every six months until maturity. You can hold or sell a bond before it matures. Rates are currently 3.375% for 20-year bonds and 3.000% for 30-year bonds.

Learn more about Treasury marketable securities at the treasurydirect.gov website.

Savings Account Alternatives

Two alternatives to your traditional savings account may be a:

• High-yield savings account

• Money market account

High-yield saving accounts typically pay higher interest because they’re solely online. That means providers don’t have the expense of maintaining physical locations. Many high-yield accounts currently offer an annual percentage yield (APY) of more than 2%.

Check to ensure that any potential online bank is FDIC insured and has the services you need.

You can also open a money market account, which generally provides more interest than a traditional savings account. Money market accounts also offer more flexibility—for instance, you may be able to write checks directly from the account rather than transferring the money into your checking account and then writing a check.

However, like your savings account, you’ll still be limited by the number of transfers and withdrawals you can make each month.

Money Market Funds

It’s easy to confuse money market accounts with money market funds—but the two are different. With a money market fund, you invest in low-risk securities. According to this Forbes Advisor article, these can include “U.S. Treasury bonds, corporate bonds, and other short-term, low-risk investments to achieve conservative gains instead of aggressive growth.”

Money market funds are a type of mutual fund. Like mutual funds, they have fees. Make sure to check the expenses you will pay before investing since fees will cut into your returns.

What’s Best for You?

You can do better than let your money earn a meager interest rate at your local bank—but which options are right for you? That depends on your situation, including liquidity needs, time horizon, and in the case of online accounts, technological savvy.

Our cash management service helps clients manage their cash reserves so that their money receives earnings, rather than sitting uselessly in the bank. We account for clients’ goals and liquidity needs to help create an appropriate strategy.

We offer a complimentary 15-minute call to discuss your financial situation and concerns and share how we may be able to help.

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