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by Maurie Backman | Published on Aug. 16, 2022
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There are still other places to consider putting your money.
Check out The Ascent's picks for best high yield savings accounts
Since the start of the year, consumers have been burdened with soaring living costs due to inflation. That's put a lot of people in a tough spot, and many have had to slash expenses or rack up debt to make ends meet.
The Federal Reserve wants to help put an end to rampant inflation. As such, it's been moving forward with a series of interest rate hikes.
The Fed is not tasked with setting consumer interest rates directly. Rather, it oversees the federal funds rate, which is what banks charge each other for short-term borrowing. But when the federal funds rate rises, banks tend to pass those costs onto consumers in the form of higher borrowing rates. And the hope is that as borrowing becomes more expensive, consumers will start to spend less, thereby closing the gap between supply and demand that's led to soaring inflation this year.
But while borrowing may be getting more expensive for consumers, the good news is that savings accounts are starting to pay more generously. In fact, if you look at the interest rate on your savings account, you may find that it's notably higher than it was a few months ago.
Of course, earning more interest on your money is better than earning less, so it's okay to be happy with the fact that your savings account is paying you more. But it's also important to remember that if your goal is to generate a strong return on your money, there are better places to do that than in a savings account.
These days, a lot of savings accounts are paying 1.5% to 2% interest. Compared to the rates we've seen over the past few years, that seems high — and it is. But while 1.5% or 2% might seem like a lot, those rates pale in comparison to the sort of return you might generate in a brokerage account or IRA.
Both traditional brokerage accounts and IRAs let you invest your money in assets like stocks. And in doing so, you might snag an average yearly interest rate of 7%, 8%, or more.
For context, the stock market's historical average is around 10%, so depending on how you invest and how well your portfolio does, your return might be higher, lower, or comparable to this rate. But either way, if you invest in an IRA or brokerage account, you have an opportunity to snag a considerably higher return than what a savings account will pay you.
That's an important thing when you're saving for a far-off goal, like retirement. You need the money you're setting aside to grow at a rate that surpasses the rate of inflation. A savings account generally won't get you there — but an IRA or brokerage account could.
It absolutely makes sense to keep funds you have earmarked for emergency expenses and unplanned bills in your savings account. But money beyond that should go into an IRA or brokerage account so you can grow it into a larger sum over time — and enjoy that wealth down the line.
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts can earn you more than 19x the national average savings account rate. Click here to uncover the best-in-class picks that landed a spot on our shortlist of the best savings accounts for 2022.
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Maurie Backman writes about current events affecting small businesses for The Ascent and The Motley Fool.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers. The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.
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