How to earn more money from your savings now that banks are raising interest rates

The Federal Reserve has raised its key interest rate five times this year, most 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, the demand for goods and services will drop, thereby causing prices to fall.

A side effect of those increased interest rates is that banks can increase the amount of money they pay to consumers who put some of their dollars in savings accounts. As banks earn more on the money they lend, those same institutions can offer higher returns to their customers.

Think of it as the virtuous cycle of the lending and saving relationship that banks have with their customers. But until recently, the interest earned on savings accounts hasn’t been all that impressive.

“Every interest rate has failed quite far from previous decades,” said Bankrate.com chief financial analyst Greg McBride in an email.

Up until this year, McBride said, interest rates had declined for the better part of 40 years — and so has the amount of money that banks pay into those accounts.

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

“By 2020, the Fed funds rate was near zero, Treasury yields were under 2%, and mortgage rates were 2.5% to 3%.”

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

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

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

Those low interest rates on savings account deposits recently caught the attention of lawmakers on Capitol Hill, who pressed big bank CEOs last week on why rates weren’t higher.

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

Some financial institutions, especially those that are Internet-only with no brick-and-mortar 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 online banks have fewer overhead costs than brick-and-mortar branches, and also must do more to compete for deposits.

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

McBride, the chief financial analyst for Bankrate.com, said it is easy to enroll in one of those accounts, even if you do your primary banking elsewhere.

“You can open an online savings account with just a few minutes of your time, and link it to the checking account at your current financial institution in order 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 reach out and ask to transfer your money into the new, higher yielding account.”

In some cases, banks aren’t making it clear to existing customers that they can now obtain a greater savings-account yield, McBride said.

“We are seeing some chicanery where banks roll out a new savings account that offers an attractive yield while the existing account holders remain in the original account with the original rate,” McBride said in an email.

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

Brian Cheung contributed.