Savers Rejoice: Higher Interest Rates Bring Better Returns
As the Federal Reserve forecasts a slower pace of interest rate cuts, many people may be discouraged, especially those with debt. However, experts say that savers with money in high-yield cash accounts will benefit from a “higher for longer” regime.
A Good Year for Savers
“If you’ve got your money in the right place, 2025 is going to be a good year for savers — much like 2024 was,” said Greg McBride, chief financial analyst at Bankrate. Returns on cash holdings are generally correlated with the Fed’s benchmark interest rate. When the Fed raises interest rates, those for high-yield savings accounts, certificates of deposit, money market funds, and other types of cash accounts generally rise too.
The Impact of Higher Interest Rates
Higher interest rates increase the cost of borrowing, which is bad news for consumers. However, they can also help individuals build savings and prepare for emergencies or opportunities, said Marguerita Cheng, a certified financial planner and CEO of Blue Ocean Global Wealth.
High-Yield Savings Accounts
High-yield savings accounts that pay an interest rate between 4% and 5% are still prevalent, according to McBride. By comparison, top-yielding accounts paid about 0.5% in 2020 and 2021. Online banks offer the most competitive returns for high-yield savings accounts, not traditional brick-and-mortar banks.
Money Market Funds
Money market fund interest rates vary by fund and institution, but top-yielding funds are generally in the 4% to 5% range. However, not all financial institutions pay these rates.
Considerations for Investors
When choosing between a high-yield savings account and a CD, consider liquidity and access. High-yield savings accounts provide more liquidity and access, but the interest rate isn’t fixed or guaranteed. CDs provide a fixed guaranteed interest rate, but you give up liquidity and access.
Important Reminders
Some institutions may have minimum deposit requirements to get a certain advertised yield. Additionally, not all institutions offering high-yield savings accounts are necessarily covered by Federal Deposit Insurance Corp. protections. Make sure to send your money directly to a federally insured bank to ensure deposits up to $250,000 are automatically protected in the event of a failure.
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