How can you make more money with your savings now that banks are raising interest rates?

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The Federal Reserve has raised its key interest rate five times this yearmost recently on Wednesday, as part of its ongoing effort to slow the pace of inflation.

The idea is that since the US central bank is making it more expensive to borrow money will decrease the demand for goods and services, causing prices to fall.

A side effect of that increased interest is that banks can increase the amount they pay to consumers who put some of their dollars in a savings account. Because banks earn more from the money they lend, those same institutions can offer their customers a higher return.

Think of it as the vicious circle of the credit and savings relationship that banks have with their customers. But until recently, interest on savings accounts was not that impressive.

“Every interest rate has fallen quite a bit from the previous decades,” Bankrate.com chief financial analyst Greg McBride said in an email.

Until this year, McBride said, interest rates had fallen for the better part of 40 years — and so had the amount of money banks deposit into those accounts.

“Looking back to the early 1980s, Fed interest rates, government bond yields and mortgage rates were in double digits,” he said. “In 1990, the Fed fund rate was over 8%, the Treasury bond rate was 7% to 9%, the mortgage rate was 10%.

“By 2020, the Fed fund rate was close to zero, government bond yields below 2% and mortgage rates 2.5% to 3%.”

Now that these rates are rising again, money costs more money.

But that means there is an opportunity to get higher returns on deposits. McBride advises clients to shop around to get the best return on their savings.

Not all banks have significantly increased their interest rates on savings accounts. According to the Federal Deposit Insurance Corp. is the average interest rate on a national savings account: 0.17%.

Those low interest rates on savings accounts recently caught the attention of lawmakers on Capitol Hill, who last week pressured the CEOs of major banks as to why interest rates weren’t higher.

“As rates continue to rise, we expect to continue to increase the rates we pay to customers,” Wells Fargo CEO Charlie Scharf said in a congressional testimony on Thursday.

Some financial institutions, especially those with internet only and no physical locations, have traditionally advertised higher interest rates with their high-yield savings account products. Some of these banks offer more than 1% or 2% — and in some rare cases, more than 3% on savings accounts, according to NerdWallet representative Chanelle Bessette.

Bessette said that online banks have less overhead than brick-and-mortar branches, and also need to do more to compete for deposits.

Both Bankrate and NerdWallet offer lists of institutions that currently offer the highest returns. Among them are Discover, Capital One, American Express Savings and Marcus from Goldman Sachs.

McBride, Bankrate.com’s chief financial analyst, said it’s easy to sign up for one of those accounts, even if you’re doing your primary banking elsewhere.

“You can open an online savings account in just a few minutes of your time and link it to the checking account at your current financial institution to move money back and forth seamlessly,” he said. “If your bank has rolled out a new savings account with a higher yield than the one you’re currently in, just get in touch and ask to transfer your money to the new, higher-yielding account.”

In some cases, banks don’t make it clear to existing customers that they can now get higher returns on their savings accounts, McBride said.

“We’re seeing some cheating where banks are rolling out a new savings account that offers an attractive return while the existing account holders stay in the original account at the original interest rate,” McBride said in an email.

“It’s easy enough to switch to the new account, but you have to take the action to make that happen, the bank won’t knock on your door with that opportunity.”


Brian Cheung contributed.

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