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Maximizing Bank Deposit Yields

March 08, 2023

After decades of near zero interest rates, the US economy is finally experiencing a period of rising interest rates. While this is bad for prospective borrowers it creates a great opportunity for many savers. However, after so many years of low interest rates many savers have become complacent and therefore are less active in attempting to maximize their earnings on their savings.

First, it is important to not hold too much money in a low-yield or zero-yield checking account. Following years where savings rates offered only a tiny amount of interest over zero interest checking accounts, many people became accustomed to using their checking account as their primary bank account with little thought to shifting money to accounts with higher yields. Now, the difference between the yields paid on checking accounts and other saving vehicles are much larger making it important to efficiently allocate balances to the proper accounts. A checking account should only contain the monthly operating capital of the household. Other funds, including emergency funds as well as short and longer-term savings, should be allocated to high yielding accounts such as money market accounts.

Second, compare banks and the interest rates that they are offering on deposit accounts. BankRate.com is a great resource to search the money market and certificate of deposit rates that banks are offering. In many cases, the highest rates are being offered by online savings banks. These banks do not have brick and mortar operations which allows them to keep their expenses low and pass on higher interest rates to depositors. The deposits are still FDIC insured as they are in other banks and balances can be transferred online between existing checking accounts and the online bank accounts. In some cases, these banks are even offering incentives for new depositors in addition to the higher yields.

Third, make sure you are getting the rate that is advertised. Some banks have created new, higher yielding accounts which are advertised to new customers while continuing to pay lower interest rates on their legacy accounts. Therefore, it is worth the time to check the rates that a bank is advertising and compare it to the yields actually earned on existing accounts. If there is a discrepancy it is worth making an inquiry as many banks will convert their legacy accounts to the new higher yielding accounts rather than lose depositor funds.

Fourth, despite higher interest rates currently offered, it is important to remember that interest rates have still been lower than the rate of inflation. Therefore, even an account that is getting a competitive interest rate is likely losing purchasing power over time. In some cases this cannot be avoided as it is important to have a sufficient amount of money on hand to cover monthly living expenses and to have an emergency fund in case unexpected expenses arise. In addition, bank accounts are often the best option for short-term savings that is intended to fund a planned purchase in the near future. However, longer-term savings that is intended to fund long-term financial goals, such as retirement or a child’s education, may be better allocated away from savings vehicles to longer-term investment accounts in an effort to achieve returns that outpace the rate if inflation. It is rare that bank account interest rates offer positive return after taxes and inflation are considered. Typically, investors must accept some level of risk in order to grow their wealth over time.