Fed raises rates-depositors have to wait

It’s not news anymore that the Federal Reserve raised the federal funds rate about 4 months ago and that the nation’s largest banks then raised their prime lending rates. The prime rate, among the most widely used benchmarks in setting home equity lines of credit and credit card rates, is based on the federal funds rate.

The banks, however, didn’t rates their rates for savers and you shouldn’t expect increases on your deposits any time soon.

The common wisdom is that it will take a couple of rate hikes before the banks raise their interest rates on your deposits. There are a couple of reasons for this. One is that the rate the banks offer on your deposits is not directly tied to the federal funds rate and bank margins have been very thin in the current rate environment.

The way to get the best interest rates available on bank deposits is to go to bankrate.com and search for the highest yielding CDs (Certificates of Deposit) and/or money market accounts. Online only banks are fine and many times offer higher interest rates because they save money by not having brick and mortar branches staffed with tellers and other bank officials. Whether the bank is online only or not, use bank that has a 4 or 5 star rating, so you know they are currently in good financial condition. Check your bank every month on bankrate.com and if its star rating slips below 3, you may want to consider moving your money.

Currently rates on money market accounts and short-term CDs are very close. Which begs the question, why would you open a CD that has penalties for early withdrawal, when you can open a money market account with no penalties and about the same interest rate?

Well … it may be worth checking the rate on longer term CDs, such as CDs that mature in 5 years, even if you’d like to have the money available in less than 5 years. Check the penalty for early withdrawal. Sometimes you can come out ahead by taking an early withdrawal if the penalty is less than the extra amount you made opening the CD with the longer term and higher interest rate.

Remember, that bank deposits are best for short terms needs like an emergency fund or something you think you may need this year or maybe next. Even though your principal is insured, you lose purchasing power as inflation outstrips the interest the bank gives you on your deposit.

Saving for retirement or other longer term goals are best accomplished by putting your principal at risk. The most conservative way to do this is with broad-based index funds.

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