Point of Interest (Rates)

Posted: Updated:

The U.S. Federal Reserve has been raising interest rates. Some say too fast, others say not fast enough. Rising interest rates will impact credit card, mortgage, and student loan rates as well investment returns. What does this mean for your finances?

The Federal Reserve and Interest Rates

The Federal Reserve (the Fed) controls interest rates by raising and lowering the federal funds rate. This is the rate banks charge each other to lend funds overnight to ensure they meet the Fed’s liquidity requirement. Banks base all short-term interest rates, including those for your checking and savings accounts, on this rate.

During the Recession of 2008, the Fed lowered interest rates to 0.25 percent. While this may have been positive if you were looking to lock in a mortgage rate, you were essentially getting next to nothing on the cash sitting in your financial accounts. Interest rates remained at this level until the Fed felt growth had stabilized enough for it to initiate an increase in December 2015. Between 2015 and the most recent increase in September 2018, the Fed has raised interest rates eight times with rates increasing from the 0.25 percent range to 2.25 percent range.

So what does this mean for you and your money? It’s not all negative. One positive result is that banks and other savings institutions have increased the interest rates they pay you on the cash deposited in your accounts. Do you know the yield you’re getting? If not, you could be cheating yourself!

Interest Rates and Your Financial Accounts

The interest rate you are getting on cash will depend on who the custodian is, the type of account, and how much cash you have in that account. Because every custodian is different, it’s important to do your research and shop around. Examine your bank, credit union, and/or brokerage firm to determine whether your yield is competitive.

Traditionally, you’ll receive higher interest on cash in your checking and savings accounts from a credit union compared to a brick-and-mortar bank. Similarly, an online bank will typically have higher interest rates than a brick-and-mortar bank, because of the online bank’s lower operating costs.

According to bankrate.com, the standard checking account at a brick-and-mortar bank pays an average of 0.07 percent annual percentage yield (APY), while many online banks and credit unions will have yields around 2.00 percent.

What does this mean to you? For example, let’s say Paul has $20,000 in an account yielding 0.07 percent and $20,000 in an account yielding 2.00 percent, both being held for one year.  The $20,000 yielding 0.07 percent will provide him with about $14 in interest payments that year, while the $20,000 yielding 2.00 percent will provide him with $400.  Keep in mind these are before tax dollars.

Be sure to pay attention to the minimums as well, because some institutions will provide a higher return for larger sums of cash.  Adding a couple hundred bucks to your account could mean the difference in receiving a higher yield.

Money market funds can be similar in yield to the checking and savings accounts of online banks or credit unions. These also vary in interest depending on the custodian.  Money market funds can be taxable or non-taxable. If you are in a higher tax bracket or are more sensitive to income, then a non-taxable money market fund may be a more attractive way to receive tax-free interest on your investment.

For additional information on investing during a rising interest rate environment, see Jonathan Koop’s article, Rising Interest Rates: Impact on Investments, published June 25, 2018.

Summary

Interest rates have been so low for so long that many people are still used to getting next to zero return on their cash holdings. In this rising-rate environment, that’s changing fast. Do your research! Contact your financial institutions to make sure you’re getting the most yield out of your cash!

Austin Stagman is an Investment Analyst with Bedel Financial Consulting Inc., a wealth management firm located in Indianapolis. For more information, visit their website at bedelfinancial.com or email Austin.

  • Perspectives

    • Marketing is No Mistake

      We all know, "People make mistakes." So true. Yet it's not an excuse for the marketing blunders that seem to reach customers a bit too often. Many can be chalked up to carelessness, insensitivity and lack of relevance or connection. Most organizations could benefit from a communications audit.

    More

Subscribe

Name:
Company Name:
Email:
Confirm Email:
HTML
INside Edge
Morning Briefing
BigWigs & New Gigs
Life Sciences Indiana
Indiana Connections
INPower
Subscribe
Unsubscribe

Events



  • Most Popular Stories

    • Amazon Picks NYC, Northern Virginia

      Amazon.com Inc. (Nasdaq: AMZN) has officially announced a decision to split its second headquarters between New York City and northern Virginia. The company first announced plans for HQ2 in 2017, with plans for a $5 billion investment and 50,000 jobs. Early this year, Indianapolis was named one of 20 finalists for the project. Chief Executive Officer Jeff Bezos says...

    • Park, Museum, Burger Among 'Best of' Indiana

      The state has announced a new group of "Best of Winners." The honorees, selected by online voting, include Best State Park, Turkey Run State Park in Marshall; Best Museum, The Children's Museum of Indianapolis; and Best Burger, Brew Burger in Jasper. Lieutenant Governor Suzanne Crouch says "with all the terrific choices that Hoosiers were able to pick from, I am not sure how they were able to narrow it down to the winners in each category."

    • Greenwood to Recognize New City Projects

      The city of Greenwood will showcase some $11 million in recently-complete projects designed to boost the quality of life in the Johnson County city. The new Surina Way connector is one part of the slate of downtown work and will be the focus of Tuesday's ribbon-cutting. Surina Way involves new sidewalks, decorative lighting, landscaping and a bioswale system that the city describes as a drainage innovation. Additional projects complete this year include...

    • Work Begins on $21M LaPorte Hospital

      Beacon Health System and Franciscan Health have broken ground on the $21.6 million Franciscan Beacon Hospital in LaPorte. The hospital will feature a full-service emergency department, inpatient care, lab services, diagnostic equipment and telehealth capabilities. Construction is set to be complete in early 2020. The project involves about 28,000 square feet of new construction and nearly 20,000 square feet of renovation at the current Beacon Medial Group building.

    • (Image courtesy of WTWO in Terre Haute.)

      Tom McClanahan to Retire

      After some 47 years at WTWO-TV in Terre Haute, Tom McClanahan has announced his retirement. Now an anchor for sister station WAWV, McClanahan was WTWO's senior weekday anchor for 26 years until 2008. The Indiana State University graduate is a Sullivan County native who also briefly worked at WTHI-TV in Terre Haute and in cable advertising sales. Since 1971, McClanahan's duties have included news photographer, reporter, anchor, sports director and account executive.