On Nov. 2, the Fed raised interest rates by 75 basis points for the fourth time this year in an effort to curb rising inflation, lifting the target for the benchmark Federal funds rate to a range of 3.75% to 4%—its highest level since 2008.
While this latest increase of the Federal funds rate may be making headlines for its potential influence on the economy at large, these changes have a way of filtering down into your own finances. When rates rise or fall, areas of your personal finances like your debt, your employment situation, and even your savings account will all likely be impacted in a big way.
A few key terms you should know:
- Annual Percentage Yield (APY): The amount of interest your savings account earns in a given year.
- High-yield savings account: A type of savings account that offers a higher yield on the money you keep in your account than traditional savings accounts.
- Certificate of deposit (CD): A type of savings account that pays interest in exchange for setting aside money for a fixed period.
- Fixed APY: Rates that remain unchanged for a set period.
- Variable APY: Rates that fluctuate depending on economic changes.
How the Fed’s rate hike can impact savings accounts
When the Fed hikes rates, this can raise the cost of borrowing, making it more expensive to take out a loan, raise your credit card APR, or lead to layoffs within companies looking to cut costs. However, higher rates do carry a major benefit: The APY on your savings account (like your high-yield savings account or certificate of deposit) will likely increase along with it and you may have the opportunity to earn a bit more interest on your savings. The opposite is true when the Fed decreases the federal funds rate. According to the FDIC, national deposit rates stand at about 0.21%, but this figure varies depending on the type of savings account you have.
“Higher interest rates slow spending and encourage savings among households and businesses,” says Steve Rick, Chief Economist at CUNA Mutual Group. “This reduction in spending and investment will slow economic growth and inflationary pressures.”
How savers can take advantage of a higher rate
If you’re unsure how to use this latest hike to your advantage. Here are a few ideas:
- Shop around for the highest possible rate: When rates rise, brick-and-mortar financial institutions, as well as online banks and credit unions may raise rates to attract new customers and remain competitive in the space. Take advantage of a changing economic climate by shopping around and comparing the rates being offered to you across various savings products. You may also benefit from promotional offers that could waive or lower your opening deposit or monthly fee.
- Boost your savings: Take this time to revamp your budget and see where you can make cuts and reallocate funds into your savings. If you don’t have a budget, don’t sweat it. Budgeting strategies like the 50/20/30 method or zero-based budgeting can help you figure out where you may be overspending and how to reorganize.
- Let compound interest work for you: Sometimes one of the best ways to build your savings and earn interest is to keep your hands off your savings. When you make frequent withdrawals, you’re lowering the principal balance in your savings account and reducing the potential interest you may earn. If you have a hard time not dipping into your savings, consider putting your money in a CD that will incentivize you to save and not spend your savings with a higher, fixed rate and penalize you if you withdraw money with an early withdrawal penalty.
Rate hikes can sound like bad news, but that may not be entirely true. While they could have some negative impacts on you if you carry steep debt balances, they could also work to your advantage if you act quickly and lock in a higher rate on your savings account that your future self will thank you for.
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