A guide to saving when interest rates are rising
When interest rates are rising, you may think twice about borrowing money–but higher interest rates can create plenty of ways for you to earn more, like with a higher annual percentage yield (APY) on your savings account. The bottom line: When rates are up, it’s a great time to add to your savings for a healthier…well, bottom line.
Why do interest rates rise?
Whether they’re rising or falling, a big reason for change in interest rates is the Federal Reserve, aka the Fed. One of the Fed’s jobs is to help keep the economy on solid ground. And if things are looking shaky, one way the Fed will try to help make the economy more stable is to adjust interest rates.1
When the Fed adjusts interest rates, it’s based on the federal funds rate—a range with an upper and lower limit set by the Federal Open Market Committee (FOMC) to guide lending among U.S. banks.2,3 The fed funds rate also acts as a measuring stick for the annual percentage yield (APY) of deposit accounts such as checking and savings. When the FOMC raises rates, banks may react by increasing the APYs you earn from these accounts.2
If economic growth is lagging, the Fed may lower the fed funds rate to motivate people to borrow money from banks and help boost the economy. But if there’s a threat of inflation, and the Fed feels the need for folks to put the brakes on spending, they may start raising the fed funds rate.1 That’s when you may want to start looking for ways to save more—and earn more—with a higher savings rate. To better understand interest rates, read more here.
What to do when interest rates are high
It may not be the best time to take out a loan during high or rising interest rates, but it could be a good time to put more money into a high-yield savings account.2 That’s because while high rates can mean higher costs if you borrow money, it also can also mean more earnings on your savings.4 Here are a few steps you can take to start saving when interest rates are rising.
Set your financial goals
It’s important to have a good grasp of your financial goals before you begin saving. An easy way to get started is to know whether you’re saving for short-term goals, such as a vacation or holiday shopping, or long-term goals like retirement or a down payment on a new home. Either way, saving more when rates are high or rising can create more return on the money in your account.
Consider a high-yield savings account
If you’re looking for a way to possibly maximize your savings interest—and who isn’t—you could look into a high-yield savings account. It’s just what it sounds like: a savings account that usually comes with a higher interest rate than a traditional savings account, earning you more interest on your balance.5 You might not get rich overnight, but you can usually earn much more than a savings account with a lower rate. High-yield savings accounts are especially good for meeting short-term savings goals.5
When considering a high-yield savings account, make sure you look at the bigger picture beyond a high interest rate. Are there monthly fees? How about a required minimum balance? Does it provide FDIC insurance for your money up to the maximum allowed in the unlikely event of a bank failure? Each of these things could have an effect on your savings. Learn more about high-yield savings accounts.
Start an automatic savings plan
One way to help you grow your money in a high-yield savings account is through an automatic savings plan. Many savings accounts offer this feature, which lets you set a dollar amount that gets automatically deposited or transferred into your savings account on a schedule that you decide.6 Choose how much and how often, then set it and forget it. If you’re often thinking about whether you’re putting enough away in savings, an automatic savings plan is a great way to give you peace of mind without having to keep it top of mind.
Add to your savings account for emergency needs
Whether interest rates are high or low, your financial goals should include starting an emergency fund for any unexpected expenses. A good rule of thumb is to tuck away 3 to 6 months worth of living expenses in this fund, though when inflation is spiking you may want to add more money to cover the rising costs of gas, food and home expenses.7,8 (Here’s where an automatic savings plan might come in handy.) A savings account is a good option for an emergency fund, since you can take out the cash whenever you need it without a penalty. If you already have an emergency fund, great—just make sure you add to it as needed to keep it at that 3- to 6-month milestone.
Consider CDs or CD laddering
Looking for a long-term savings solution when interest rates are high? Look no further than certificates of deposit (CDs). With a CD savings account, the bank keeps your money in the account for a set term, which could range from 6 months to several years.9 If you remove your savings before the term ends, there’s usually a penalty—but because you’re expected to keep your money in the CD for the term, it often has a higher interest rate than traditional savings accounts.
A big reason a CD is such an attractive savings option is that usually it comes with a fixed interest rate. So even if the Fed drops interest rates after you open a CD, guess what: The higher rate you opened the CD with is guaranteed for the length of the term—which means guaranteed returns for your savings account.
Concerned about the commitment of a single longer-term CD? You could look into CD laddering, where you divide the money you invest into different CD terms (1-year, 2-year, 3-year, etc.)—giving you the flexibility of earning higher interest while still having access to a portion of your money sooner in case of emergencies or other financial opportunities.
Will interest rates go down?
Interest rates may fluctuate. If they’re high or rising now, at some point they’ll most likely go down. In the meantime, you can use the steps above to help you make the most of your money when interest rates are up—and help you decide on the best savings accounts for meeting your financial goals.
Now that you have answers, it’s time to start saving. Compare and open a Capital One savings account today and enjoy one of the best savings rates in America.
