Many banks are finally increasing the yields on their online savings accounts and certificates of deposit, tracking the interest-rate hikes the Federal Reserve started in March to combat higher prices.
For instance, Ally Bank increased its online savings account’s annual percentage yield (APY) to 0.90% from 0.75% last week, while American Express upped its high-yield savings account yield to 0.75% from 0.65%. More increases could be on the way after the Fed this week hiked its rate again — this time by three-quarters of a point — and signaled increasing by another 1.75 points throughout the rest of the year.
But even with the higher yields, those saving for an emergency face a problem: The dollars they sock away in those accounts will still lose value because inflation is outpacing their returns. Don’t dwell on it, experts say.
“At a time when inflation is running 8.6%, no liquid and safe option is going to come close to that,” Greg McBride, chief financial analyst at Bankrate, told Yahoo Money. “Instead of viewing your emergency savings in the context of how much you’re trailing inflation, think of it as a buffer from credit card debt at 16% when unplanned expenses arise.”
Here are your options.
Where to find the best savings yields
When it comes to getting the best APY on savings instruments, don’t walk into the major banks, said Ken Tumin, founder of DepositAccounts.com by LendingTree and a senior industry analyst. Instead, turn to online banks, which provide the best rates versus the big guys.
“Rates from online banks, they’ve been going up this year,” Tumin said. “In the last three months, the rate increases have been accelerating.”
The APY on online savings accounts started in March at 0.49% before the central bank’s first rate hike. By the beginning of June, that rate was 0.73%, according to DepositAccount.com. For all banks, that rate was 0.13% at the start of June, reflecting the low, low rate that the major national banks offer.
The story is much the same for CDs, which overall provide a higher return because your money is locked up for a set period.
One-year CDs at online banks offered 0.67% APY at the start of March. By June 1, that rate jumped to 1.49%. For all banks, the average is 0.4%. For five-year CDs, online banks offer 2.53% APY, up from 1.08% in March. For all banks, the rate is 0.84%.
“You can see by these averages, the quickest, easiest bang for your buck is to open an online savings account. You don’t need to change banks, just link to your checking account,” Tumin said. “You’ll get a much, much higher yield than at that brick-and-mortar bank and you still have all the liquidity.”
Other options
If you’re still worried about inflation eating away at your savings, you may also want to consider Treasury I bonds.
“Especially if you have less than $10,000, I bonds make more sense and are indexed with inflation,” Tumin said.
But there are two main issues with I bonds, if you’re considering these as a spot for emergency savings. First, the annual purchase limit is $10,000 per individual ($20,000 for married couples), which may not be enough for your entire emergency fund.
The other downside is you can’t redeem them for the first 12 months after you buy the I bond.
“So don’t put all your eggs in that basket if it’s your emergency fund,” Tumin said. (You can find out the full details on I bonds here.)
After that first year, if you redeem before five years, you sacrifice three months of interest. But that’s better than the early withdrawal penalty on most five-year CDs, which can range from giving up six months of interest up to 30 months of interest. In certain cases, you could even lose principal, Tumin said.
Another option is investing in Treasury notes and bills, which are putting pressure on banks to raise their CD rates, Tumin said.
“Much of those yields are higher than what online banks offer,” he said.
Janna is the personal finance editor for Yahoo Money. Follow her on Twitter @JannaHerron.
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