Tag: Select_Advice

The Federal Reserve has raised its benchmark interest rate by 0.25%.

While we don’t know for sure what moves the Fed will make with interest rates this year, the consensus is the pace of rate increases is expected to slow. Barring something unexpected, the most severe rate hikes are likely in the rearview mirror and the Fed may even begin dropping rates in 2024. This makes now a good time to lock in a fixed rate certificate of deposit (CD) while interest rates are (possibly) peaking.

Below, CNBC Select goes into more detail about why you should look into that CD, as well as other short-term moves you might want to make in the wake of today’s rate hike.

Today’s interest rates present opportunities and challenges. On the one hand, the cost of borrowing money is increasing. This makes mortgage and auto loans more expensive to take out and increases the cost of variable-rate debt, such as credit cards. The other side is that the annual percentage yield (APY) on savings accounts, CDs and money market accounts is much more generous to savers.

Here’s what you can do right now to help limit the damage of higher rates or boost your returns.

Lock in a high rate with a CD

Your savings account’s interest rate can change at any time as the prevailing rates shift up or down. That means your stellar 5% savings rate may not last, so if you’d prefer to lock in today’s rate for months (or years), you may want to open a CD.

CDs offer a fixed interest rate for a set period, typically anywhere from three months to five years. CDs offer rates as good or better than what you find with savings accounts, but they aren’t as flexible. If you withdraw the money early, you’ll be hit with penalties. That makes CDs better for money you’ve earmarked for a medium or long-term goal, rather than cash you’d need to quickly access in an emergency.

Some of the best CD rates are offered by Quontic Bank and Bread Savings™ (formerly Comenity Direct). Bread Savings offers up to 5.35% with no monthly maintenance fees, but there is a $1,500 minimum deposit. Quontic Bank has a smaller $500 minimum deposit with an interest rate of up to 5.30%.

Maximize your savings account’s interest rate

Right now, the best high-yield savings accounts have interest rates of around 5%. This means if your savings account earns anywhere near the national average (under 0.50%), you can give your savings a massive boost by opening an account with a higher rate of return.

Currently, the Western Alliance Bank savings account has an APY of 5.15% with no monthly fee and no overdraft fee. This account has a $1 minimum deposit, and the rate isn’t capped, so you’ll earn this APY on any deposit amount.

Pay down variable-rate debt

If you plan on taking on debt to pay for school, a home or anything else, rising rates can quickly eat away at your buying power. And any debt with a variable interest rate will also become more expensive to service.

Prioritizing high-interest debt makes sense in today’s high-rate environment. With the average credit card interest rates currently above 20%, paying off your card balance could save you much more than what you would earn by setting aside an equal amount of money in a high-interest account.

Depending on your situation, it may even make sense to take advantage of a 0% APR credit card. These cards offer no interest for a set timeframe, usually anywhere from six to 21 months. Just pay attention to which purchases qualify for the introductory APR and any balance transfer fees.

The Federal Reserve recently announced the seventh consecutive increase to the federal funds rate and indicated its intent to continue raising interest rates going forward. The Fed has repeatedly raised rates this year in an effort to corral rampant inflation that has reached 40-year highs. However, there are signs inflation is starting to cool. 

Higher interest rates may help curb soaring prices, but it also increases the cost of borrowing which can make everyday financial products more expensive, like mortgages, personal loans and credit cards.

Given the current economic outlook and interest rate environment, saving money and paying down high-interest debt have become more appealing. Select dives into what you should do with your money after the Fed’s interest rate hike.

A complex web of factors influences the economy and interest rates in general, making it impossible to predict the future rate environment with absolute certainty. But right now there are no signs rates will be dropping anytime soon, and the Fed says it will continue rate hikes in 2023. And even if the economic outlook suddenly shifts, it’s always a good idea to focus on the fundamentals that put you on firm financial footing. 

That’s why now is a good time to reassess your approach to saving and to take a good hard look at your debt — especially debt with a variable interest rate.

Savings accounts are paying better

During the height of the pandemic, the interest you could earn on money held in a savings account was next to nothing. Even high-yield savings accounts often had APYs under 1%.

But in a world of high interest rates, savings accounts can earn much more considerable returns. Currently, the best high-yield savings accounts offer rates of over 4% with no monthly fees. 

At the time of writing, a UFB Best Savings account has a 4.11% APY with no minimum balance and no monthly fees. And it’s not the only account offering high returns. High-yield savings accounts with Marcus by Goldman Sachs and LendingClub also have APYs of 3% or more.

The cost of borrowing is increasing

While savers have reasons to rejoice during an era of high rates, borrowers may feel the financial pain of increased costs. And if you have debt tied to an adjustable interest rate, you’ll pay more for the money you’ve already borrowed.

One of the best ways to save money during times with higher interest rates is to focus on paying down your debt with the highest interest rate first. The balance on your credit card is often a good place to start, as many cards can easily have an annual percentage rate (APR) of more than 20%. That’s more than double today’s inflation rate and far higher than what you’d earn with a savings account.

An emergency fund is a vital safety net

Building up an emergency fund is a wise decision regardless of the economy’s health.

Your personal circumstances can take a turn for the worst even if the broader economy is doing well. Although there is debate as to how much you should save in your emergency fund, a good target is to have enough funds to cover three to six months of living expenses. And, keeping your emergency fund in a high-yield savings account allows you to earn interest and have your cash work for you.

With inflation, savings rates, and interest rates on debt all at elevated levels, you may have to balance building your savings with paying down debt.

The Federal Reserve is continuing to raise its benchmark interest rate. That means rates for mortgages, personal loans, credit cards, and savings accounts are likely to continue increasing.

Although there are signs that the pace of the increase in rates may be slowing, the Fed hasn’t signaled it will stop with the rate hikes anytime soon. With high rates, saving becomes more appealing, and paying off your debt is even more important.

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