The news regarding interest rates has largely seemed bleak lately, amid continued Fed rate hikes and raising rates on mortgages and loans. But there is an upside to this rate environment: higher savings rates. And already, these higher rates are coming to fruition, with rates on savings accounts significantly higher than they were just a year ago.
Here's a look at where savings rates are expected to head in 2023, how continued Fed activity will affect these rates, and how — and why — to seize on higher savings rates.
Where are savings rates expected to head this year?
According to Kiplinger, interest rates right now "are higher than they have been since 2007" — and they're "expected to peak in 2023."
Already, savings rates have grown exponentially from this time last year. Early in 2022, Nerdwallet recalls that "some of the best savings accounts earned a mere 0.50% annual percentage yield," whereas in late March 2023, the "best savings accounts earn[ed] more than 3% APY and high-yield savings accounts top[ped] 4% APY." Meanwhile, Bankrate's April roundup of the best savings accounts revealed rates that were nearing 5% APY. The table below includes a range of current top interest rates.
However, don't be surprised when rates aren't nearly that high at some of the largest banks, which tend to have much, much lower rates — as low as 0.01% APY.
When you apply via links on our site, we may earn an affiliate commission.
How do the Fed rate hikes affect savings rates?
The Federal Reserve has continually increased interest rates recently, with March bringing the ninth consecutive rate hike in the Fed's continued efforts to fight inflation. While rate hikes spell bad news for borrowing money, which becomes more expensive, it's good news for savers. As Kiplinger notes, "as the federal funds rate increases, interest rates on high-yield savings accounts and CDs typically do too."
If the Fed continues to raise rates, then Kiplinger predicts that savings interest rates will "likely continue to go up." However, if inflation starts to slow and the Fed begins to lower rates, then savings rates could follow suit and become less enticing.
Why are higher savings rates a big deal?
As CNN explains it, "[h]igher rates mean your most liquid savings — those set aside for emergency expenses or short-term goals like a vacation fund or even a down payment that you'll need in the next 12 months — can finally earn some money for you after years of earning practically nothing."
While a 4% APY might not sound that groundbreaking, the interest earned on money parked in your savings account can absolutely add up over time. For instance, if you have $10,000 in your savings account, with a 4% APY your balance will grow to $10,400 within a year — even if you aren't making any additional contributions to your existing balance. That's $400 for your money just sitting in a high-yield savings account. Meanwhile, in that same scenario but with an APY of 0.01% — the APY of many major brick-and-mortar banks — your money would grow by just $1.
There is some urgency to the recent rate spikes, too. Given the reality that Fed rate hikes — and inflation — won't last forever, Kiplinger reports that "some experts are recommending that savers lock in savings rates now to take advantage of the best APYs."
How can you find the best rates on savings accounts?
If spiking savings rates in 2023 are tempting you to make a switch, it helps to know what to look for. Here are some tips for finding the best rate, as well as an account that suits your needs:
- Focus on online banks. In general, online banks will offer the most competitive savings account APYs. Consider focusing your search there, as opposed to more traditional brick-and-mortar banks, and take your time to shop around and compare offerings at different banks.
- Steer clear of tiered rates and teasers. With tiered rates, you'll get a different yield depending on your account's balance. However, Kiplinger advises that "if you plan on using your savings at some point, opting for an account with a flat APY is likely a better choice." It also recommends steering clear of teaser rates which are "promotional rates banks use to attract new customers" that Kiplinger says tend to be "short-lived."
- Factor in any fees. You might find an account with a phenomenally high savings rate, but if its fees are similarly high, those two things can cancel each other out. Kiplinger notes that some high-yield accounts can come with "strings attached," such as minimum requirements for your accounts balance to avoid a charge.
- Consider savings account alternatives. A high-yield savings account isn't your only way to take advantage of peaking savings rates. If you're comfortable with tying up your money for a bit, you might also consider a certificate of deposit (CD). Or, CNN suggests Series I savings bonds, which it says are "designed to preserve the buying power of your money." There are some caveats involved — investments top at $10,000 a year and you can't redeem your bond in the first year and without penalty between years two and five — but CNN still argues that it can still "preserve the buying power of your $10,000 if you don't need to touch it for at least five years."
Becca Stanek has worked as an editor and writer in the personal finance space since 2017. She has previously served as the managing editor for investing and savings content at LendingTree, an editor at SmartAsset and a staff writer for The Week. This article is in part based on information first published on The Week's sister site, Kiplinger.com.
New Tax Rules for 2023: Download your free issue of The Kiplinger Tax Letter today. No information is required from you.
