5 Secrets to Saving When Interest Rates are High
January 12, 2023
by Kimbree Redburn
It’s no secret inflation has been on the rise for the last several months. This increase in inflation has led to a decrease in spending power for consumers. The squeeze inflation puts on already tight budgets can make it difficult to find ways to save. But, saving right now has its advantages.
One of the ways that the Federal Reserve is trying to slow inflation is by raising interest rates. This means the rate at which banks lend money to other banks increases. It also increases interest rates consumers face on mortgages and car loans. But did you know that it can also increase the interest that you earn on your savings account?
This means the money you save will work a bit harder for you right now. Even though inflation may be causing your budget to feel tight and it might be hard to find money to save, as interest rates rise, it’s a good time to maximize your savings. And there are things you can do to help you save right now.
Let’s talk about 5 secrets to saving money when interest rates are high.
Secret #1: Review Your Budget
The first secret to saving when interest rates are high is to review your budget. Knowing where your money is going is always something you should be aware of. But when you are trying to find more money to put in savings, it is especially important. To find more money you can put into your savings, you need to compare your income to your current spending.
Review your bank records for the last several months. Determine how much you earn each month. If your income is variable or inconsistent, compare several months’ worth and find the average.
Next, look at your expenses. First, make a list of all your essential or necessary expenses. This will include housing, transportation, groceries, medical expenses, childcare expenses, debt repayments, insurance premiums, and any other expenses you have to pay each month to stay afloat. Then make a list of all of your other optional expenses.
Once you have a total of your income and expenses, subtract your expenses from your income. If there is something left over, commit it to saving.
But, even if there isn’t something left over, reviewing your budget can help you find ways to save.
Look at your optional expenses. Are there some that you can cut back on or cut out entirely? If you are spending on things that don’t bring you joy or that you don’t have to spend on, you can stop those purchases and instead put your money towards your saving goals.
Secret #2: Check Your Subscriptions
Another secret to finding money to save when interest rates are high is to check on your current subscriptions. According to CNBC, the average consumer spends $219 a month on subscription services.
When you’re looking for more money in your budget to save, checking in on your subscriptions is a great place to start. Go through your recent bank or credit card statements and make a list of all of the different subscription services you are currently paying for.
Note how much each service costs and the payment due date. Then, look closely at your list.
If you see any subscription services you aren’t using at all (or completely forgot you had), cancel them and commit the monthly payment to savings instead. For the subscriptions still left on your list, look carefully at each. Do any of them duplicate services? Are there less expensive alternatives?
Once you’ve eliminated all the subscriptions you don’t use or want, you’ll have more money you can save each month.
Secret #3: Treat Saving as a non-negotiable expense
Sometimes, we don’t save as much as we want because we treat saving as optional and aren’t budgeting for saving. This often doesn’t leave us much to save because we typically spend what is available to us.
So instead, in the words of Warren Buffet, “do not save what is left after spending, but spend what is left after saving.”
When you make saving a priority, it is important to have this reflected in your budget. To do this, treat saving as a non-negotiable expense. When you create your budget, include your savings goals broken down into manageable chunks in your essential spending.
This will help ensure you’re putting money away each month toward your goals. It also will help you keep your spending more aligned with your goals which can keep you motivated and on track.
Secret #4: Find Less Expensive Alternatives
When looking for money in the budget to save, people often jump to cutting expenses, which can be helpful. But it is also a good idea to examine your spending habits to see if you can change what you buy or how you spend to save yourself some money.
Finding less expensive alternatives can help you free up some cash to stash away in your savings account. You’ve already done the heavy lifting for this if you’ve reviewed your expenses because you’ll have a good idea of what you’re spending in different areas of your life.
The next step is to see if there are less expensive options that can help you save money. Shifting your grocery spending away from name brands towards generic or store-brand items can often help you save on your grocery bill.
Other less expensive alternatives to consider are doing workouts on YouTube or outside to get rid of an expensive gym membership or checking books and movies out from your local library instead of buying them. As you find less expensive alternatives, you can commit the difference to savings.
Secret #5: Find the Best Account to Maximize Your Savings
The other four secrets to saving when interest rates are high focus on things you can do. But, it’s also important to think about where you are saving your money.
Some bank accounts will respond more quickly to rising interest rates than others, offering higher interest rates on the money you save. It’s also possible to save your money in a different type of account to take advantage of higher rates.
Consider a High-Yield Savings Account (HYSA)
You may want to open a high-yield savings account to take advantage of the higher interest rate. According to Investopedia, it isn’t uncommon to see a high-yield savings account with an interest rate 20 to 25 times higher than the interest rate you’d see with a traditional savings account.
This is a massive difference in interest earned over a year. Putting your money in an account that will earn more interest will make it work harder for you and will help you reach your goals sooner. A high-yield savings account is a good option to hold your emergency fund. It gives you easy access to your money but still helps it earn more interest.
There are many options for high-yield savings accounts for you to choose from. When you decide to open an account, be sure to do your homework. Make sure you understand the minimum requirements to open the account, any fees the account has, and if there are any minimum balance requirements. Compare the different options and pick the account that best meets your needs and will help you reach your goals.
Look into Certificates of Deposit (CDs)
CDs are another option that typically will earn you more, especially if interest rates are high. A CD is a savings option that earns interest on a fixed amount of income you leave invested for a certain amount of time. While on the surface a CD may seem like a savings account, there are a few key differences.
- First, you’ll add a fixed amount of money to a CD, and that’s it. You won’t add more over time. If you want more money in CDs you’ll need to set up a new one.
- Second, the money has to stay in the account for a set period of time. The time period will depend on the length of CD you choose. Typical CD lengths range from three months to five years. The longer you are willing to leave your money in the CD, the higher the interest rate will usually be. But, your money will be tied up for the duration of the CD, and if you need to access it earlier, there will often be a penalty.
- The third way CDs differ from savings accounts is the interest you’ll receive is guaranteed.
Again, if you choose to use a CD to take advantage of higher interest rates, remember to be sure you understand the ins and outs of the account. You should compare accounts to pick the one with the best terms and highest interest. A CD may be a good place to store funds for longer-term goals, but often because of the early withdrawal penalties, it’s not the best place for your emergency fund.
Consider Other Banks
When looking for the right account options for your savings, one thing you should consider is what options are available outside your current bank. Different banks offer different interest rates and different account choices. And some banks may respond more quickly to raising interest rates than others. This is especially true for online banks. They don’t have the same overhead as brick-and-mortar banks, so they are often able to raise rates more quickly.
So, if you are considering opening a new account for your savings, it’s a good idea to shop around and find the best deal. This doesn’t mean you have to abandon your current bank entirely. But if you can find a better savings account option at another bank, it may be worth pursuing.
Saving money is one of the best things you can do to set yourself up financially for the future. Whether it’s building up your emergency fund or saving for your next vacation, having money set aside gives you security, options, and freedom.
While it’s always important to save, it is especially important to maximize your savings during times when interest rates are high. This is because the money you’ve saved will be working harder for you.
To kick your savings up a notch, be sure to review your budget and build savings in as a non-negotiable expense, check in on the subscription services you pay for, price compare for less expensive alternatives, and find the best account to maximize your savings! You don’t have to start big, you just have to get started!