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Here's why you likely won't earn more on your savings even when the Fed increases rates

Consumers saved up enough during the pandemic that banks no longer need to compete for cash.

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With the Federal Reserve expected to raise interest rates come March, many are left wondering whether or not that will be good news for their savings accounts.

Typically, savings account APYs fluctuate in accordance with the federal funds rate. But the pandemic posed a unique caveat: Americans of all income levels built up their savings so much during these last two years that banks don't need to offer attractive, higher interest rates to lure more consumers — or, in other words, more deposits.

In short, all this is to mean that savers might not see any immediate changes in the amount of interest they're earning in their bank account when the Fed does raise rates later this year.

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So, where should your savings be stashed?

Online high-yield savings accounts

When the Fed cut interest rates to near 0% to help support the economy in the beginning of the pandemic, savers soon saw the domino effect in their bank accounts.

However, as even high-yield savings account APYs dropped to less than 1%, their yields still outpace the 0.06% return you would earn keeping your money in a traditional savings account. For this reason, you're best off keeping your savings in a high-yield account at an online bank — even if rates don't go up this year.

With an online-only bank, you may not get access to a physical branch, but the resulting low overhead costs mean they often offer higher interest rates and lower fees. The convenience of apps and online banking portals also helps make up for the loss of face-to-face interaction that you get with brick-and-mortar banks.

When considering which online high-yield savings account to choose, consider Select's top-ranked Marcus by Goldman Sachs High Yield Online Savings, as it offers a higher-than-average APY, no fees whatsoever and easy mobile access. It is the most straightforward savings account to use when all you want to do is grow your money with zero conditions attached.

For anyone looking to do all their banking in one place, the Ally Online Savings Account offers both a high-yield savings account and a checking account with debit card access to over 43,000 free Allpoint® ATMs, making it easy to withdraw cash when you need to.

Short-term CDs

Besides online high-yield savings accounts, another savings option are CDs as they may offer even higher interest rates. With CDs, you earn a fixed interest rate for a specific amount of time, ranging from three months to five years, and you can't access your money before your term ends. Though a longer term usually comes with a higher APY, it means keeping your money locked up for longer.

In a rising interest rate environment, however, you could miss out on CD rates going up in the years to come, which would interfere with a longer-term CD that you're locked into, such as three or five years. A shorter-term CD, like the three-month BrioDirect High-Rate CD, the six-month iGObanking High-Yield iGOcd® or the one-year CFG Community Bank CD, may be better options.

Bottom line

As we think about how our savings accounts will be affected once the Fed raises rates in the near future, the proverb "prepare for the worst, hope for the best" is a good way to look at it.

By ensuring that your savings are in an online high-yield savings account or a short-term CD, you are earning the highest interest possible while also keeping your money secure and accessible. In this way, you're preparing for the worst — interest rates not going up — but if they do, your money will already be in place to benefit.

Before moving around your cash, compare the best CDs with short-term maturities to the high-yield savings accounts that you are considering so you land on the best place for your savings.

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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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