Tag: Personal income

Don’t assume the interest on your savings account is keeping up with Federal Reserve rate hikes. Here’s why

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As the Federal Reserve continues to hike interest rates, you may assume you’re earning more on the money in your savings account.

But that may not be the case.

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Carolyn McClanahan, a certified financial planner at Life Planning Partners in Jacksonville, Florida, was recently surprised when a client told her he was hardly making any interest on his cash.

The interest rate on his Capital One account was 0.3%, far lower than the 3.3% annual percentage yield the firm is currently advertising for new savings accounts. McClanahan discovered the same situation when she checked her own Capital One account.

“I was not happy,” McClanahan said.

While a call to Capital One’s customer service revealed it was possible to access the higher interest rate by opening a new account, McClanahan decided it was better to move the money elsewhere.

“I’ve been recommending Capital One for a long time, and they are now off my list,” McClanahan said.

Capital One did not immediately respond to requests for comment.

The Federal Reserve has raised the federal funds rate to the highest levels since 2007. While that makes borrowing more expensive for credit cards and other accounts, the expectation is that it will also push up the interest consumers can make on their cash savings.

Some online savings accounts are touting rates as high as 4%. Some certificates of deposit, or CDs, may provide higher rates, depending on the term.

Rates are expected to climb even higher as Federal Reserve poised to continue its hiking cycle in 2023. Bankrate.com predicts top-yielding national money market and savings accounts could climb to 5.25% by year end.

Yet like McClanahan, others may be in for a surprise if they realize their accounts are not keeping up with those top rates.

“Consumers need to check their accounts at least once a month to see what their accounts are earning,” said Ken Tumin, senior industry analyst at LendingTree and founder of Deposit Accounts.

“Don’t assume it’s the latest greatest rate,” he said.

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Following Fed rate hikes, online savings accounts should generally be in the ballpark of the federal funds rate within about a month, according to Tumin.

There are signs that may help consumers spot when they may get shortchanged on rates.

Watch for changing account names, Tumin said. If a bank is touting savings offers under a new account name from when you opened your account, the terms you are subject to might not be the latest.

If you see a new account, often you can request to be upgraded.

“That’s an easy way to get the benefit of the higher rate,” Tumin said.

Also be more vigilant when a bank, such as Emigrant Bank, has more than one online division, Tumin said. In September, Emigrant’s Dollar Savings Direct division was the first to offer 3% on an account, which eventually climbed to 3.5%.

Now, however, its My Savings Direct division has the highest rate for an online account, with 4.35%, Tumin noted.

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January 3, 2023
Inflation and credit-card debt are on the rise, despite a strong job market. Tell us how the economy is affecting you.

We want to hear from readers who have stories to share about the effects of increasing costs and a changing economy. If you’d like to share your experience, write to readerstories@marketwatch.com. Please include your name and the best way to reach you. A reporter may be in touch.

For many people living in the U.S., these are tough — and confusing — times.

On Friday, the Labor Department reported 263,000 new jobs in November, while the unemployment rate held steady at 3.7%. Layoffs remain low, despite mass job cuts in the tech sector. Average hourly wages have also risen 5.1% in the past year, but still lag behind inflation for many workers. And there were 10.3 million job openings in October — slightly down from the previous month’s 10.7 million.

Some people might see the latest economic data as both challenging and confusing.

After all, the cost of living rose 7.7% on the year in October. The once red-hot housing market is finally cooling, thanks to mortgage rates that have more than doubled over the last year amid the Federal Reserve’s attempts to rein in inflation, and rents, while moderating, have surged from pre-pandemic levels. Borrowing money to cover increased precarity is becoming more expensive too, with the average credit-card APR at 19.2% as of Nov. 30, according to Bankrate.

“‘It’s just mind-boggling, the disconnect that we’ve seen.’”

Given all the conflicting signals, economists say it can be difficult for consumers to know exactly how to feel about the economy right now. “It’s not new, this disparity between the actual facts on the ground about what’s going on in the economy and the sentiment,” said Heidi Shierholz, president of the Economic Policy Institute, a left-leaning think tank.

“I remember this summer it was just unambiguously the strongest jobs recovery we’ve had in decades,” she added. “There’s just absolutely zero chance that we were in a recession — not only were we not in a recession, we were in just an extraordinarily fast recovery — and the polling, a huge share of people actually thought we were in a recession. It’s just mind-boggling, the disconnect that we’ve seen.”

Still, the fact that inflation is eating into people’s savings — and that essential goods like food, energy and housing have spiked in cost — is bound to make many people unhappy.

Struggling to pay for rent and food

“Going into the pandemic, more than seven out of every 10 extremely low-income renters were already spending more than half of their income on rent. And then the pandemic hits; we saw a lot of low-wage workers lose their jobs and see an income decline,” said Andrew Aurand, vice president for research at the National Low Income Housing Coalition. “Then in 2021, we see this huge spike in prices. For a variety of reasons, they’ve struggled for a long time, and since the pandemic, it’s gotten even worse.”

Moderate-income Americans are struggling too. Maybe you can’t afford your favorite family meals, as the price of grocery store and supermarket purchases has jumped by 12.4% from last year. Or maybe you’re putting off a trip to see family this holiday season thanks to the higher cost of airfare, or you’re worried about losing your job as some business leaders warn of a recession. Perhaps you’re forced to rely on credit cards and personal loans, as credit-card debt is up 15% from a year ago.

MarketWatch has chronicled many of these changes, detailing renters’ frustrations, families’ tough choices at the grocery store, and the reality faced by would-be home buyers sidelined by higher rates and dwindling affordability.

But we would like your help telling an ongoing story about the American economy, centering the experiences of everyday people. Our readers know better than anyone about how today’s economic conditions have impacted their daily lives.

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December 2, 2022
How Congress may make it easier to set money aside for emergency expenses

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Many families struggle to come up with the cash when faced with an unexpected $400 expense.

That lack of emergency savings may force them to borrow money at high interest rates to pay for the surprise expense, putting their financial security at risk.

Now Congress has a window to address that issue by paving the way for new emergency savings plans in the lame duck session.

Three emergency savings proposals may be included in a legislative package known as Secure 2.0, which is set to amplify changes to the retirement system brought by the Secure Act in 2019.

“We’re on the cusp of a significant shift in how people save for emergencies in this country, thanks to public policy and private sector innovation,” said Shai Akabas, director of economic policy at the Bipartisan Policy Center, during a recent web panel hosted by the Washington, D.C., think tank.

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The panel discussion coincided with an open letter from the Bipartisan Policy Center Action with 40 organizations to Senate Majority Leader Chuck Schumer, D-N.Y., and Minority Leader Mitch McConnell, R-Ky., as well as House Speaker Nancy Pelosi, D-Calif., and Minority Leader Kevin McCarthy, R-Calif.

The letter called for the inclusion of three bills that would amplify emergency savings in the pending retirement package.

“We firmly believe emergency savings policy aligns with the goals of the U.S. retirement system and will help boost financial resiliency for American households,” they wrote.

Why emergency savings falls short

Anti-eviction banners are displayed on a rent-controlled building in Washington, D.C., on Aug. 9, 2020.

Eric Baradat | AFP | Getty Images

The Covid-19 pandemic was a stress test for many Americans’ finances.

As many parts of the economy shut down, many individuals and families found their incomes were reduced or eliminated altogether.

The federal government stepped in and sent unprecedented amounts of aid through three rounds of stimulus checks, enhanced federal unemployment benefits, direct monthly child tax credit payments to parents and other policies.

Yet the pandemic still led some workers to withdraw funds from their 401(k) or other retirement savings accounts, putting their long-term financial futures at risk.

Those that had at least $1,000 in emergency savings at the height of the pandemic were half as likely to withdraw from their retirement savings accounts, according to the Aspen Institute.

“As people face that crisis, you need that liquid savings to protect your long-term investments and make sure you have a secure retirement and build wealth,” Tim Shaw, associate director of policy at the Aspen Financial Security Program, said during the Bipartisan Policy Center panel.

Covid relief measures helped push the share of families who could cover an unexpected $400 expense with cash or an equivalent method to 68% in 2021, a 4-percentage point increase from 2020. It also marks the highest level since the Federal Reserve began the survey in 2013.

Still, 1 in 3 households would need to borrow money to cover a $400 emergency, which is still “far too many,” Shaw noted.

How 3 proposals may encourage savings

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Advocates are hoping three proposals that could help encourage emergency savings will be included in Secure 2.0.

That includes two bills proposed by Sens. Cory Booker, D-N.J., and Todd Young, R-Ind., as well as a third created by Sens. James Lankford, R-Okla., and Michael Bennet, D-Colorado.

One proposal from Booker and Young would enable employers to provide emergency savings accounts to workers in addition to their retirement savings accounts. Employees would be able to set aside up to $2,500 automatically that they could access at any time in case of an emergency.

The second proposal from Booker and Young would allow for separate standalone plans outside of retirement accounts, which would be “really important” for employees who don’t currently have retirement plans through their employer, Akabas noted.

A third, the Lankford-Bennet plan, would allow workers to take out up to $1,000 from their retirement accounts penalty-free in case of an emergency. Those withdrawals would only be allowed once per year; additional contributions would be required before making another withdrawal.

Chantel Sheaks, executive director of retirement policy at the U.S. Chamber of Commerce, said she has “fingers crossed” that all three proposals will make it into Secure 2.0 and that the legislation will pass.

“From an employer’s viewpoint, we need choice,” Sheaks said.

What may work for one employer may not work for another, she noted. The three proposals would allow for more options, including possibly encouraging employers who do not current have retirement plans to think about adopting them, Sheaks said.

Moreover, because hardship withdrawals can reduce workers’ retirement security, these emergency savings options can help prevent those stumbling blocks to building wealth.

“People have emergency needs today, and we can’t forget about those emergency needs,” Sheaks said. “We need to find a way to balance today’s needs with tomorrow’s needs.”

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November 25, 2022