Strategies for 2023: Savings, Money Market, & CD Accounts
When the Federal Reserve implements rate hikes, it does so as a measure to fight inflation.
When rates rise, people who save money win.
The cost of borrowing money for big-ticket items such as home mortgages increases when rates rise, but so does the benefit of saving money.
You can leverage the rise in interest rates to boost your savings when interest rates on a wide range of savings vehicles increase in lockstep with the Federal Reserve rate hikes.
Below we’ve outlined our top savings strategies to help you take advantage of rising interest rates.
Why Is Now a Good Time to Save Money?
The internet is awash with articles about money-saving strategies. Budgeting, curbing frivolous spending, putting money into an employer-match 401(k), and eliminating high-interest credit card debt will always be important strategies for financial success.
Putting your money into savings and money market accounts, certificates of deposit, and interest-bearing checking accounts can bring additional financial security, especially if national rates for deposit accounts continue to rise.
The table below shows how the landscape has changed for various savings products.
The year-over-year differences in rates are significant.
The national deposit rate is the average rate paid by all FDIC-insured institutions and credit unions.
Many banks offer much better rates in an effort to lure in more customers.
The Treasury yield, meanwhile, is the rate you can expect to earn if you hold a government-backed security until it reaches maturity.
This year is a good time to start funneling money into savings accounts, especially since greater financial uncertainty and the looming threat of a national recession have roiled public equities markets and sent them into bear territory.
Keep reading to learn the benefits of various savings vehicles and how they can help you grow and protect your personal finances.
Not all savings institutions are the same.
Interest rates for savings accounts at the country’s largest national banks have remained much lower than smaller competing financial institutions.
If you plan on parking additional money into a savings account, it pays to shop around.
How Savings Rates Differ at Traditional Banks
While one national bank’s standard savings account may offer a meager .01% rate (though rates may be slightly higher in your area), another of the largest national banks may offer an interest rate of .15% percent for its standard savings account, though rates may jump to .25% or higher for premium-level savings accounts.
Another savings account could offer a .05% interest rate on standard savings accounts, though rates are doubled for customers who maintain monthly balances of $30,000 between eligible accounts.
Higher Rates at Regional and Online Banks
Lesser-known banks may prove a more viable option if you are hoping to grow your money in a standard savings account.
For example, a smaller, Northeast regional bank may offer a 3.93% interest rate on its high-yield savings accounts, with interest rates on standard savings accounts between .01% and .03%.
A national credit card company could offer a high-yield savings account that starts at 3.3% and has no monthly fees or account minimums. Another may have a high-yield savings account that can be started with just a $500 initial deposit and has a 3.75% annual percentage yield.
Because rates change on a daily basis, we purposely left out naming the institutions above, rather, but these examples are intended to provide you with a snapshot of the savings account landscape.
Different banks offer different terms. Look around for the best options.
Compare savings and money market account rates, features, and more.
Money Market Accounts
Money market accounts can be another great way to save money, especially with the significant jump in interest rates.
Money market accounts are available at most financial institutions and work a lot like checking accounts — you usually can access the funds using checks or a debit card.
Since they are considered deposit accounts, money market accounts are limited to six transactions each month (ATM and in-person withdrawals are often excluded, though).
Money Market Account Rates
The benefit of parking money into a money market account is that they generally return higher interest than standard savings accounts.
It’s worth noting that the national deposit rate for money market accounts has been running slightly higher than the national average for savings accounts.
The catch here, though, is that you’ll typically have to open an interest-bearing money market account with a significant initial deposit, which is often $5,000 or more depending on the financial institution.
This type of account often works best for people with short-term financial goals. If you are considering opening a money market account, it pays to shop around to find the best/highest interest rate.
As noted, large financial institutions with a national footprint may offer less favorable terms than smaller regional banks, credit unions, or online banks.
Certificates of Deposit
Certificates of deposit (CDs) are a bit like money market or savings accounts in that you can put money into them for a specific period of time, but that’s where the similarities end.
CD Interest Rates
CDs return a fixed interest rate for a specific length of time.
There are a variety of short-term CDs, including 30 days, 90 days, and six months, and a number of longer-term CDs, up to five years.
In order to fully avoid early withdrawal penalties or lower-than-expected interest rates, you must leave your CDs intact until their full maturity date.
This makes them less liquid than savings accounts, especially for two-, three-, four-, and five-year certificates of deposit. The benefit of that illiquidity, however, is that CDs typically offer superior interest rates versus competing savings products.
Choosing a CD Term
CD terms vary by length and by the financial institution, so searching around for the best terms could yield a wide range of competing rates that are likely well above the national average.
CDs often prove attractive to investors since they limit volatility and provide a clearly defined yield.
Monthly or quarterly interest payments are added to the balance of the CD, which helps grow the initial deposit through compound interest.
Rising interest rates mean you’ll enjoy a slight uptick in returns on certain types of checking accounts. However, checking accounts are most often used to pay bills and as an easy way to get money when we need some walkabout cash.
Still, checking accounts can be a good place to park and grow your money, especially if you have a checking account that’s harder to access.
Many consumers opt for multiple checking accounts. One acts as a primary account that’s used to pay the majority of bills, while the other acts as a repository for additional cash.
You won’t earn much interest on your checking account balances, but it could be a good way to avoid spending since the cash isn’t in your purse or wallet.
Checking accounts also provide financial convenience. You can schedule automatic payments so you are never late on paying bills, and you can use your debit card or smartphone for most purchases.
Online checking accounts are worth checking out because they offer some great bonuses and promotions.
If you have high checking account balances and know you won’t need to access the funds, consider investing some of your money in short-term CDs, a money market account, or another savings vehicle that yields higher returns.
5 Ways to Make the Most of Your Savings
The best savings plans usually start with a goal, followed by implementing a savings strategy.
Here are five suggestions for maximizing your savings efforts in 2023.
Purchase Certificates of Deposit With Your Extra Liquidity
Sure a $40,000 checking account looks nice and raises eyebrows among bank tellers, but having a huge balance in your checking account isn’t doing you much good.
Purchasing short- and long-term certificates of deposit allows that money to grow with minimal risk, and the varying lengths of time can help avoid a liquidity crunch if you need the money.
Open a savings or money market account at an online or regional bank
As noted, the country’s largest financial institutions don’t typically offer the same interest rates as credit unions or regional and online banks.
Look for the best interest rates on high-yield savings accounts.
This type of account could maximize your savings efforts with very little extra effort on your part.
Automate Your Savings Efforts
Another tip that requires little effort. Setting up automatic transfers to preferred savings vehicles allows you to quickly grow your savings.
Use Your Checking Account’s Automatic Savings Feature
Some checking accounts round up purchases to the nearest dollar and send the extra change into your savings account.
This is a great way to build savings without feeling the pinch of depositing a larger amount of money into your account all at once.
Frequently Asked Questions
Here are five commonly asked questions about savings.
Amassing a large pool of personal savings happens over time. In the short term, you can look for banks that offer bonuses for opening accounts, as well as financial institutions that offer higher-than-average interest rates on deposited funds. Make saving your highest priority, eliminate frivolous spending, and stick to the plan, and you may be amazed at how fast you can increase your personal wealth.
There are many compelling reasons to implement this saving strategy. Laddering is the process of purchasing certificates of deposit with varying maturity dates. By mixing short-term and long-term maturity dates, you can leverage today’s high interest rates on long-term CDs while still enjoying near-term liquidity. You can adjust investment amounts to maximize yield, and if rates continue to rise in 2023 you can reinvest the principal and proceeds gained from short-term CDs into CDs offering those higher interest rates.
The vast majority of brick-and-mortar financial institutions and most online banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The FDIC covers checking, savings, and money market accounts, as well as CDs.
This is more a matter of personal preference. However, having a broad mix of savings vehicles, such as CDs, money market, and high-yield savings accounts, could help maximize your savings efforts and yield greater returns.
The number here varies for each person depending on income and expenses. The 50/30/20 rule created by Senator Elizabeth Warren could serve as a rough guide for many savers. Using the rule, you’ll spend 50% of your monthly income on needs, 30% on wants, and 20% on savings. Adjust this strategy as your budget allows.