Will Bank Accounts Start Paying More Interest in 2022?
- Many savers earn minimal interest in their bank accounts.
- While we can't expect rates to soar overnight, they may climb this year.
There's a good chance they will. Here's why.
There's a reason having a savings account is so important. You need a safe place to stash the money you have socked away for emergency expenses, like home repairs or medical bills. And while it can be tempting to invest your emergency cash to grow it into a larger sum, you run the risk of losing principal rather than preserving it like you're supposed to.
That's why a savings account is your best bet for your emergency savings, and for other savings you expect to use soon, like money you're stashing away for a down payment on a home. The problem with savings accounts, though, is that they pay minimal interest. That's especially been the case over the past few years.
But interest rates for bank accounts could climb in 2022 for one big reason.
Why interest rates could climb this year
The Federal Reserve plans to raise its federal funds rate this year after pausing rate hikes to allow for a recovery from the pandemic. Now to be clear, when we talk about the Fed raising rates, we're not talking about consumer interest rates like credit card rates, mortgage rates, and bank account rates.
The Fed is in charge of establishing short-term borrowing rates that banks charge one another. But its actions can influence consumer interest rates both for better and for worse.
This year, mortgage rates might climb in response to the Fed's actions, which isn't a good thing, as it will make borrowing for a home more expensive. But rising bank account interest rates are a good thing, as they help consumers earn more interest on their money.
Now we shouldn't expect a substantial increase in bank account interest rates. But is there a good chance banks will start paying higher interest rates than what consumers have access to now? Absolutely. While an uptick in interest may not make a huge difference in your finances, you might as well earn as much money on your savings as you can.
How much money should you keep in the bank?
As a general rule, it's a good idea to stash away enough cash in a savings account to cover three to six months of essential bills. That's your emergency fund.
If you're saving for specific goals, like buying a house or a car in the near term, you'll want to keep the cash you have on hand for that objective in savings as well, the amount of which will depend on the big purchase you're targeting.
But if you have money you don't expect to need for five years or more, then it does pay to invest that money in a brokerage account. You can stick to a traditional brokerage account or open an IRA, which comes with restrictions but offers tax benefits in exchange for your commitment to lock that money away until retirement.
Another thing you should know is that when bank account interest rates rise, that's not always made obvious -- just like banks don't always send out an alert when interest rates drop. So if you have money in savings, it pays to check on your account details once a month or so to see what your interest rate looks like.
As the year moves along, you may find that your rate slowly ticks upward. And if it doesn't, you may want to shop around and see if there's a bank that's paying more interest than what yours is giving you.
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