Savings rates are rising: Where should you put your cash?

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With interest rates on the rise and many big banks paying minimal returns on traditional savings accounts, you might be losing out if your cash is still sitting in a basic account at a large institution.

Thanks to a series of Federal Reserve rate hikes that started last year, you can now find alternatives to traditional savings accounts that earn a lot more interest — with some options paying an annual percentage yield, or APY, of 4% or more.

Treasury bills, money market accounts and certificates of deposit are also worth considering if you’re on the hunt for higher rates.

Key takeaway: With interest rates rising, if your money’s in a basic account at a big bank, you’ll likely find other accounts now that’ll let you earn more on your savings.

Why savings rates are rising

To help support the economy during the pandemic, the Fed cut short-term interest rates  — which kept bank APYs on savings relatively low. But by late 2021, inflation had flared up and the Fed soon changed course, beginning a series of rate hikes designed to cool an overheated economy.

With interest rates heading higher, you could be giving up money by keeping your cash in a traditional savings account. Here’s the math:

If you have $1,000 deposited in a traditional savings account at a big bank that pays the current average rate of 0.35%, your deposit would earn $3.50 over the course the year.

If you put the same $1,000 in a high-yield savings account paying an annual percentage yield, or APY, of 3%, you’d earn $30 over the course of the year. Of course, the larger your bank balance, the more you stand to gain.

Options for high-yield savings

The search for higher returns can go beyond high-yield checking and savings accounts. Here are more options that can help you better meet your short-term savings goals.

  • High-yield savings accounts — Often available online, these accounts can offer much higher APYs than you’d find with traditional savings accounts.
  • High-yield money market accounts — A money market account is essentially a hybrid between a checking and savings account. It lets you write a limited number of checks each month and sometimes make debit purchases.
  • T-bills — Treasury bills are short-term investments that you can redeem for their face value in one year or less. You can buy T-bills online directly from the U.S. government at TreasuryDirect. Rates on a six-month T-bill in February 2023 topped 4.85%.
  • Certificates of deposit A CD is a bank account that pays you a higher interest rate in return for locking your money away for a certain period of time.

See our picks for the best high-yield savings accounts.

Why savings matter

You never know when you might need to rely on your savings to handle unexpected expenses like a major household repair, hospital visit or job loss. Having ready access to an emergency fund can help you keep your finances on track.

What to do

  • How much to keep on hand — A good rule of thumb is to set aside enough cash to cover three to six months of living expenses. But even $1,000 or so is a good start.
  • Where to keep an emergency fundSafe storage and easy access when you need it are key, so a regular savings account — or high-yield savings account — may be your best bet.
  • When to use it — Generally, you should tap your emergency fund only as a last resort. You may want to create guidelines for yourself on what constitutes a financial emergency before you ever have to tap it.

About the author: Brad Hanson is a senior editor at Credit Karma. His 30 years of experience in print and digital media includes work for the Los Angeles Times-Washington Post News Service, and Polyvore. Most recently before… Read more.