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Banking

The Fed increased interest rates again — here's why you should save more and pay off debt in response

The Fed raised rates for the seventh time this year in response to high inflation.

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The Federal Reserve recently announced the seventh consecutive increase to the federal funds rate and indicated its intent to continue raising interest rates going forward. The Fed has repeatedly raised rates this year in an effort to corral rampant inflation that has reached 40-year highs. However, there are signs inflation is starting to cool. 

Higher interest rates may help curb soaring prices, but it also increases the cost of borrowing which can make everyday financial products more expensive, like mortgages, personal loans and credit cards.

Given the current economic outlook and interest rate environment, saving money and paying down high-interest debt have become more appealing. Select dives into what you should do with your money after the Fed's interest rate hike.

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Why the Fed's decision to raise rates means it's time to save and pay down debt

A complex web of factors influences the economy and interest rates in general, making it impossible to predict the future rate environment with absolute certainty. But right now there are no signs rates will be dropping anytime soon, and the Fed says it will continue rate hikes in 2023. And even if the economic outlook suddenly shifts, it's always a good idea to focus on the fundamentals that put you on firm financial footing. 

That's why now is a good time to reassess your approach to saving and to take a good hard look at your debt — especially debt with a variable interest rate.

Savings accounts are paying better

During the height of the pandemic, the interest you could earn on money held in a savings account was next to nothing. Even high-yield savings accounts often had APYs under 1%.

But in a world of high interest rates, savings accounts can earn much more considerable returns. Currently, the best high-yield savings accounts offer rates of over 4% with no monthly fees. 

At the time of writing, a UFB Best Savings account can earn up to 4.21% APY with no minimum balance and no monthly fees. And it's not the only account offering high returns. High-yield savings accounts with Marcus by Goldman Sachs and LendingClub also have APYs of 3% or more.

UFB Best Savings

UFB Best Savings is a Member FDIC.
  • Annual Percentage Yield (APY)

    Earn up to 4.21% APY

  • Minimum balance

    None

  • Monthly fee

    None

  • Maximum transactions

    No max number of transactions; Max transfer amounts may apply

  • Excessive transactions fee

    None

  • Overdraft fees

    Overdraft fees may be charged, according to the terms, but a specific amount is not specified; overdraft protection service available

  • Offer checking account?

    No

  • Offer ATM card?

    Yes

See our methodology, terms apply.

Pros

  • Strong APY
  • No minimum balance
  • No monthly fees
  • Free ATM card
  • Free transfers between direct deposit accounts
  • Online and SMS banking available
  • Mobile check deposits

Cons

  • No option to add a checking account
  • No physical branch locations
  • Potential overdraft fee, though, overdraft protection is offered

Marcus by Goldman Sachs High Yield Online Savings

Goldman Sachs Bank USA is a Member FDIC.
  • Annual Percentage Yield (APY)

    3.30%

  • Minimum balance

    None to open; $1 to earn interest

  • Monthly fee

    None

  • Maximum transactions

    Up to 6 free withdrawals or transfers per statement cycle *The 6/statement cycle withdrawal limit is waived during the coronavirus outbreak under Regulation D

  • Excessive transactions fee

    None

  • Overdraft fees

    N/A

  • Offer checking account?

    No

  • Offer ATM card?

    No

Terms apply.

LendingClub High-Yield Savings

LendingClub Bank, N.A., Member FDIC
  • Annual Percentage Yield (APY)

    4.00%

  • Minimum balance

    No minimum balance requirement after $100.00 to open the account

  • Monthly fee

    None

  • Maximum transactions

    None

  • Excessive transactions fee

    None

  • Overdraft fees

    N/A

  • Offer checking account?

    Yes

  • Offer ATM card?

    Yes

See our methodology, terms apply.

The cost of borrowing is increasing

While savers have reasons to rejoice during an era of high rates, borrowers may feel the financial pain of increased costs. And if you have debt tied to an adjustable interest rate, you'll pay more for the money you've already borrowed.

One of the best ways to save money during times with higher interest rates is to focus on paying down your debt with the highest interest rate first. The balance on your credit card is often a good place to start, as many cards can easily have an annual percentage rate (APR) of more than 20%. That's more than double today's inflation rate and far higher than what you'd earn with a savings account.

Pro tip: There are a number of 0% APR credit cards that charge no interest for a set amount of time, typically six to 21 months.

An emergency fund is a vital safety net

Building up an emergency fund is a wise decision regardless of the economy's health.

Your personal circumstances can take a turn for the worst even if the broader economy is doing well. Although there is debate as to how much you should save in your emergency fund, a good target is to have enough funds to cover three to six months of living expenses. And, keeping your emergency fund in a high-yield savings account allows you to earn interest and have your cash work for you.

With inflation, savings rates, and interest rates on debt all at elevated levels, you may have to balance building your savings with paying down debt.

Bottom line

The Federal Reserve is continuing to raise its benchmark interest rate. That means rates for mortgages, personal loans, credit cards, and savings accounts are likely to continue increasing.

Although there are signs that the pace of the increase in rates may be slowing, the Fed hasn't signaled it will stop with the rate hikes anytime soon. With high rates, saving becomes more appealing, and paying off your debt is even more important.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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