Your cash savings may get a higher return but only at certain banks

Banks are starting to pay a higher return on your cash — good news for savers who’ve seen their stockpiles languishing from a gruesome combination of low interest rates and high inflation.

However, some banks are moving faster than others. Some, particularly traditional brick-and-mortar shops, may not budge for a while.

At least 10 banks have raised interest rates on their high-yield savings accounts or money market deposit accounts since mid-April, according to data compiled by Bankrate.

They include: American Express National Bank, Barclays Bank, Capital One, CIT Bank, Colorado Federal Savings Bank, Discover Bank, Luana Savings Bank, Marcus by Goldman Sachs, Sallie Mae Bank and TAB Bank, according to Bankrate. A handful of others increased yields earlier in 2022.

The rates are still relatively low — none yet pays over 1%. Most are in the range of roughly half a percent up to 0.80%, according to Bankrate data.

But the highest-yielding accounts pay about 10 times more than the national average, which is 0.06%, according to Greg McBride, chief financial analyst at Bankrate.

And consumers’ returns are likely to climb steadily higher as the Federal Reserve continues to raise its benchmark interest rate to curb inflation. The central bank cut that rate to rock-bottom levels in the early days of the Covid-19 pandemic to help prop up the economy.

“If the Fed ends up being as aggressive as they’re expected to be, the top-yielding savings accounts could clear 2% later this year,” McBride said.

“It’s the only place in the world of finance where you get the free lunch of higher return without higher risk,” he added. “It’s pure gravy.”

Financial advisors often recommend savers park their emergency funds in these types of accounts. Funds are safe (deposits are insured by the Federal Deposit Insurance Corporation) and liquid (they can be accessed at any time).

Savers should aim to have several months of household expenses handy, in the event of job loss or another unforeseen event.

Financial advisor Winnie Sun, co-founder of Sun Group Wealth Partners in Irvine, California, recommends saving at least six months of crucial living expenses (shelter, food and medication costs), plus an additional three months for each child in the household.

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Consumers don’t need to move all their funds, either. They can keep managing their day-to-day finances (their checking accounts, for example) at their current bank to avoid the hassles of switching, and open an account at a new bank solely for emergency funds, McBride said.

Not every bank is raising their payouts or doing so at the same pace.

Largely, the ones that have increased their account rates (some have done so multiple times in 2022) are online banks or the online-banking divisions of traditional brick-and-mortar banks.

They have lower overhead costs and may use the allure of higher rates to compete with traditional shops, which hold the lion’s share of customer deposits and are in “no hurry” to increase payouts, McBride said.

When the Federal Reserve raises its benchmark interest rate — known as the fed funds rate — it increases the cost of borrowing. Loans become more expensive for consumers and businesses.

Banks earn money on loan interest. As the Federal Reserve raises its benchmark rate, banks accrue more revenue from higher loan interest payments and may therefore find themselves better positioned to pay a larger yield on customer savings.

The central bank hiked its benchmark rate by a half a percentage point on Wednesday, the largest increase in more than two decades.

However, this seesaw effect won’t necessarily be true for all institutions, due to another factor. Banks use deposits to loan money to other customers. But customers flooded the U.S. banking system with cash to an unprecedented degree in the early months of the pandemic, due partly to cash-hoarding and the flow of government payments like stimulus checks.

As a result, most banks may not see the need to pay higher savings-account rates to attract deposits and fuel their loan machine.

Even as a handful of banks increase payouts, consumers are still struggling to keep pace with inflation.

The Consumer Price Index, a key inflation gauge, jumped 8.5% in March 2022 from a year earlier, the fastest 12-month increase since December 1981. As a result, money is losing its value at an elevated rate.

“Overall, you’re still way below levels of inflation,” said Sun, a member of CNBC’s Advisor Council, of high-yield savings account rates.

However, she added: “Sometimes we have to be comfortable receiving less of a return for less [worry].”

Savers may opt for different approaches with emergency savings, depending on their household situation, Sun said.

For example, individuals who don’t want to open a separate high-yield savings account at another bank can perhaps replicate those returns on emergency cash account by investing 5% to 10% (depending on one’s risk appetite) in a simple balanced fund split between stocks and bonds, she said.

This investment is subject to market risk, though. In an emergency, savers would tap the cash (and not the invested assets) to the extent possible.

Individuals who don’t have the financial capacity to fund both an emergency savings and retirement account can also consider a Roth individual retirement account, Sun said. In the event of an emergency, investors can tap their Roth IRA contributions as a last resort. (Doing so doesn’t carry a tax penalty, though withdrawing investment earnings might in a few cases such as withdrawing before age 59½. Roth IRAs also carry annual contribution limits.)