Rising Interest Rates Offer a Chance for Savers to Earn More, But Many Are Missing Out
The current high interest rate environment has created a double-edged sword for consumers. While borrowing costs have risen, there’s a golden opportunity for savers to generate significant income by choosing the right savings products. With the Federal Reserve’s key interest rate at its highest level in over two decades, a high-yield savings account or a certificate of deposit (CD) can offer APYs exceeding 5%, far outpacing the national average yield of 0.63%. However, a recent study from Santander U.S. reveals that many Americans are leaving their money in low-yield accounts, missing out on this potential passive income stream.
Key Takeaways:
- Rising Interest Rates Offer Potential: The Federal Reserve’s aggressive rate hikes have created a unique environment where savers can potentially earn more on their deposits.
- Many Missing Out on Higher Returns: A Santander U.S. study found that six out of ten middle-income Americans are holding their money in low-yield accounts, even as rates have risen.
- Lack of Awareness and Perceived Hassle: The study suggests that lack of financial literacy about interest rates and the perceived hassle of switching accounts are hindering Americans from seeking higher-yielding options.
- Opportunities in High-Yield Savings and CDs: High-yield savings accounts and CDs offer a way for consumers to earn more on their savings, with some institutions offering APYs exceeding 5%.
- Time to Lock In: Experts recommend locking in higher interest rates before they potentially decline, especially with predictions of rate cuts as early as September.
The Opportunity and the Missed Potential
The Federal Reserve’s benchmark interest rate has direct implications for consumers’ borrowing and savings options. While the rate has pushed up the annual percentage rate (APR) on credit card debt, it has also significantly increased the APYs offered on savings accounts and CDs. This presents a clear opportunity for individuals to grow their savings more rapidly.
The Santander U.S. study, "Paths to Prosperity," sheds light on the gap between this opportunity and the reality of American consumers. The study highlights that:
- 60% of middle-income Americans are leaving their money in low-yielding accounts. This signifies a missed opportunity to earn more interest and potentially grow their savings faster.
- 4 out of 5 Americans perceive opening a new bank account as time-consuming. This perception serves as a barrier for many, potentially preventing them from exploring better savings opportunities.
Tim Wennes, CEO of Santander U.S., attributes this phenomenon to a lack of awareness and understanding. He believes that many consumers are unaware of the impact of higher interest rates on savings and the array of savings products available to them.
"There’s a general lack of awareness of the interest that people are earning," Wennes said. "Or, there’s a perception that the switching costs, or the friction, related to making a change is more work than the benefit of getting higher rates."
Maximizing Savings in a High-Interest Environment
For those seeking to capitalize on the current high-interest rate environment, high-yield savings accounts and CDs offer compelling options.
High-Yield Savings Accounts:
- Flexible Access: Offer the flexibility to withdraw your funds at any time without penalty.
- Interest Rate Fluctuations: The APY on high-yield savings accounts can fluctuate based on the Federal Reserve’s benchmark rate.
- Potential for Higher Returns: High-yield savings accounts can offer significantly higher APYs than traditional savings accounts, allowing you to earn more on your deposits.
Certificates of Deposit (CDs):
- Fixed Interest Rate: CDs offer a fixed interest rate for the duration of the term, providing predictable returns.
- Limited Access: Funds are typically locked in for a set period, meaning withdrawals before maturity often incur penalties.
- Higher Potential Returns: CDs are known for their higher APYs compared to traditional savings accounts, but access limitations are crucial to consider.
Examples of High-Yield Savings Accounts and CDs:
- Bread Financial offers a 1-year CD with an APY of 5.15%.
- LendingClub offers a 1-year CD with an APY of 4.4% and a high-yield savings account with a 5% APY.
Acting Now and Locking In High Returns
With predictions of interest rate cuts potentially beginning in September, experts advise savers to capitalize on today’s high rates by locking in their returns. This can be achieved through CDs with fixed interest rates for defined terms.
"Lock in higher interest rates anywhere from six months to 12 months before rates start to decline,” suggests Wennes.
By taking advantage of high-yield savings accounts and CDs, consumers can potentially maximize their earning potential in the current economic climate. It’s crucial for individuals to educate themselves about the various options available and make informed decisions to grow their savings effectively.
