As the Federal Reserve has been steadily hiking interest rates since 2015 and is predicted to boost rates further this year, savers can take advantage of this environment: Online savings accounts and CDs are generating higher yields.
Individuals who are saving money for an emergency car or home repair should consider online savings accounts as a temporary parking place, said Greg McBride, chief financial analyst for Bankrate, a New York-based financial data and content company.
"These are federally insured, fully liquid accounts offered by banks to customers nationwide and oftentimes with very modest minimum deposits," he said. "The yields are better than what you'll find on any other liquid, risk-free instrument.
Consumers do not need to close their current checking or savings account since these online accounts can easily be linked to them.
"Money can be moved seamlessly between the two," McBride said.
For money people want to put into the stock market at a moment's notice, a money market fund at your brokerage or mutual fund company is the best answer, he said.
"You'll get a lower yield than with online savings accounts but the ability to put it to work immediately is the selling point," McBride said.
While rates have not increased drastically in savings accounts, CDs and other products, the improvement has been much more prevalent among the top-yielding nationally available accounts, he said.
The average bank money market deposit account has barely increased from 0.11% to 0.14% in the past year. However, the top-yielding money market deposit accounts and online savings accounts have increased from 1.1% to 1.6% in the past 12 months.
The trend continues and the average 1-year CD has risen from 0.33% to 0.45%, while the top-yielding nationally available 1-year CD has gone from 1.38% to 2.05%.
As the Fed has indicated a high likelihood of at least three rate hikes in 2018, savers will see better returns, particularly if they're "parking cash at the banks paying the top yields; and with higher volatility in financial markets, investors may take greater comfort in the safety of cash and feel like they're actually getting a return that justifies holding cash," McBride said. "With yields on the rise, favor the liquid online savings accounts and keep CD maturities at the 12-month mark to best position yourself to capitalize on further improvement."
Spread It Out
Savers should avoid committing themselves to a single CD for several years since the Fed will make several rate hikes this year and could increase them in the coming years. Instead, buy different CDs and stagger the terms in order to be able to reinvest regularly as rates continue to rise, said Robert Frick, an economist for Navy Federal Credit Union in Vienna, Va.
"Rates are on the move and when a year ago savers were grateful for a tenth of a percentage point increase or less, you can now find rates for some products jumping by 0.3% or 0.4% or more," he said. "Certificate rates particularly have started to rise and will probably continue to in 2018. Other savings products are not rising as much and the increases are mainly coming now from credit unions and online banks with commercial banks lagging."
As the economy continues in a rising rate environment, consumers should allocate more money into savings or pay off their credit card debt since loans will be more expensive.
"For most Americans, this translates into practical moves like refinancing any debt into lower rates, if possible, and paying off or consolidating credit card debt," said Colin Walsh, CEO of Varo Money, a San Francisco-based digital banking app. "People should also continue to save and invest for retirement in tax-advantaged accounts."