How to Maximize Savings in a Rising Interest Rate Economy

Late last month, the Federal Reserve increased the Fed Funds rate for the third time this year, reinforcing the fact we’re currently in a rising interest rate economy. While higher interest rates can lead to bigger bills for those with credit cards, mortgages or other interest-bearing debt, there is an upside: Consumers can take advantage of the rising rates to grow their savings.

Two effective savings approaches, especially in a rising interest rate environment, are depositing cash into a money market account and utilizing a time deposit laddering strategy.

IS A MONEY MARKET ACCOUNT RIGHT FOR ME?

Money market accounts can offer higher interest rates on balances, which means the money you put away may earn more over time than in a standard savings account. Be aware, however, as a money market account may require a larger deposit balance to benefit from a higher interest rate – sometimes referred to as an annual percentage yield. There are no limits on how much you can deposit into a money market account, but there are some restrictions as to how you can access the account.

Each month, you have up to six opportunities to make withdrawals and transfers from a money market account. You can make these transactions through checks, an account-connected debit card or online banking (if your financial institution offers online access).

Money market accounts are best suited for those who have funds ready to deposit and are looking for:

• A safe, FDIC-insured place to put their savings (note that there is an FDIC insurance limit of $250,000)
• Competitive interest rates to help their money grow
• Access to their funds (although there are some limits)
• Convenient check or debit features

If a money market account sounds like it could be right for you, shop around to compare interest rates and features to make sure the account you choose aligns with your financial goals.

WHAT IS A TIME DEPOSIT LADDERING STRATEGY, AND SHOULD I TRY IT?

Another savings approach is to utilize a time deposit account (TD) – a savings vehicle that typically allows you to earn interest on your money faster, or at a greater rate, than a standard savings account. With TDs, interest is compounded over set time periods (terms), which means your funds may be more likely to grow over time.

However, the TD interest rate advantages come with a stipulation: TDs lock money in for the full term, which can range from one month to five years (and beyond). The length of the term is based primarily on the interest rates associated with the TD – as a general rule, longer terms offer higher interest rates. The length of the term also depends on the financial institution that is offering the TD. For example, some banks may only offer terms up to one year, while others go beyond five years.

Accessing the funds placed in a TD before the account reaches the end of its term (known as “maturing”) can be difficult and may involve penalties, fees or charges. These restrictions can make some consumers leery. However, if you set up several TDs that each have a different term, you can enjoy a mix of both shorter-term access to your funds and longer-term growth. This is called a TD laddering strategy.

When you follow a TD laddering strategy, you put money into multiple TDs that have staggered maturity dates. For instance, if you have $5,000 to invest, you could invest $1,000 in a one-year TD, $2,000 in a two-year TD and $2,000 in a three-year TD.

Once the first account matures, you have two options: Take the money out or reset your TD with a new term and rate. The beauty of the laddering strategy is you can access that initial $1,000 (plus interest) after that first year if you need. But if you don’t, you can open a new TD with a longer term, which is likely to have the more attractive, long-term rate. Over time, your TDs will mature at different points, which provides cash access while also offering opportunities for growth.

Benefits of time deposit laddering include:

• SECURITY

TD accounts are insured by the FDIC up to the standard deposit insurance coverage limit, so you may have additional protections on the accounts you open.

• CONSISTENCY

TDs are unaffected by stock market shifts and changes, which can help balance market volatility in your financial plan.

• BETTER RATES

In the current environment, it can be difficult to predict how interest rates will look three months from now, let alone three years. However, a TD laddering strategy can help you take advantage of rate changes when each of your funds hits maturity on your staggered pace. As each TD matures, you can review your rate options and determine the best way to renew your TD or use your money.

• FLEXIBILITY

You can decide exactly how your funds are split, used and scheduled. Choose the number of TDs you’re laddering, the amount in each and the terms to reach your optimal combination of liquidity and earnings potential.

Today’s rising interest rate environment provides plenty of opportunities for consumers to bolster their savings and find a strategy that is best for their financial goals. By understanding your options and making investments now, you can put your money and the current economic conditions to work for you and grow your hard-earned dollars over time.

Karen Bohn is UMB Bank's EVP consumer and mortgage client delivery director.