Where to keep your money in a time of high inflation and rising interest rates

Finding a competitive interest rate on your emergency savings has become even more difficult in an environment of record inflation.

But there is good news. The Federal Reserve should start raising interest rates. When they do, it will increase the interest you can earn on your money.

Some accounts might be on the verge of seeing these increases first.

“Online savings accounts that currently offer competitive returns will likely be the ones that remain competitive as interest rates rise,” said Greg McBride, chief financial analyst at Bankrate.com.

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“You want to be where the banks are already paying a premium to get your money,” he said.

This is when government inflation data continues to set records.

A key measure of inflation monitored by the Federal Reserve – the core Personal consumption expenditure price index — climbed 4.9% in December from a year earlier, the fastest gain since September 1983. Consumer price index for January was up 7.5% from a year ago, another record gain dating back to February 1982.

Still, savers who want better interest rates on their money need to be patient.

It will take some time before the gap between the Federal Reserve’s 2% inflation target and interest rates on savings narrows.

Many online savings account rates currently hover around 0.50%, according to The bank rate.

It will likely take longer than 2022 to close the gap between inflation and interest rates, McBride said.

As this transition occurs, where you keep your emergency cash will become more important.

Why online accounts stand out

One of the advantages of online savings accounts is the flexibility they offer. Often there is no minimum balance or restriction on how long you can deposit money, said Ken Tumin, founder and editor of Depositaccounts.com.

The rates offered by traditional brick-and-mortar banks are generally lower than the national average annual percentage yield of 0.05%.

When choosing an online savings account, it’s important to do your due diligence to make sure it’s from a reputable financial institution. Also be sure to check for coverage from the Federal Deposit Insurance Corporation, or FDIC, which will typically protect you for up to $250,000 in deposits.

Online savings accounts are usually the best place for the amounts of money you think you’ll need in a year or two, Tumin said. If your lead time is longer, you may be able to find a better return on your money elsewhere.

Other options to choose from

Series I savings bonds are currently getting a lot of attention because of the interest rate they pay, which is currently an initial rate of 7.12%.

But there are limits. Investors can only purchase up to $10,000 in I Bonds per calendar year.

Also, you cannot cash out the money in the first year. And if you withdraw your money before five years, you’ll lose three months of interest, McBride said.

The interest rate you earn is also subject to change every six months.

“It’s fine to supplement an emergency fund with I bonds, but you probably shouldn’t totally depend on an I bond for an emergency fund,” Tumin said.

You don’t want to be stuck at a time when rates are rising.

Greg McBride

Chief Financial Analyst at Bankrate.com

Certificates of deposit, or CDs, can offer higher interest rates on your savings. Generally, the longer the term, the better the interest rate. But this will require you to lock in your money for a set period of time, which will not be beneficial as the Fed raises interest rates.

“You don’t want to be locked in at a time when rates are rising,” McBride said. “It’s like standing on the platform and watching the train go by.”

Financial experts often tout the savings features of Roth Individual Retirement Accounts, which allow you to invest after-tax money toward retirement and withdraw your contributions (not your earnings) at any time without tax or penalty. .

But there are reasons why emergency fund savers should pay attention to these, too.

Often, you can’t put the money you take out of a Roth IRA back into the account because of annual contribution limits.

“It’s better to just leave retirement money for retirement and save for emergencies in a dedicated emergency savings account,” McBride said.

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