5 Tips To Finding the Best Savings Account

Estimated read time: 4 minutes

You've likely heard about the Federal Reserve's recent interest rate hikes. You've likely also heard there are more to come. The moves have been welcomed by many savers based on their hopes the hikes would translate to higher returns on their interest-bearing savings accounts.

Those wishing to maximize their savings have many options when it comes to choosing a savings account. While the task may be daunting, there are strategies that can be employed to make sure you are maximizing your returns and remaining within your risk comfort zone at the same time.

Set your savings goals

Before you begin your search for the best savings account, identify your goals. Whether you want to build a nest egg that will allow you to live lavishly in your Golden Years or you simply want to live comfortably, there are ways to accomplish your goals.

The most popular individual retirement accounts are traditional IRAs and Roth IRAs. Traditional IRAs allow you to direct your income towards investments before taxes are withheld. Roth IRAs allow you to withdraw earnings on a tax-free basis when you retire, or any time for that matter.

However, you must remember that there could be tax consequences to making withdrawals.

Any strategy you employ to maximize your returns must start with looking at your income and your potential to earn more over the course of your life. Your strategy in taking advantage of rising interest rates can even help you decide on investing in 401(k)s or individual retirement accounts (IRAs).

Capitalizing in a rising interest rate environment

When interest rates rise, borrowing costs also go up. On that same note, savers, such as those who buy bonds, will earn a higher rate of interest. Therefore, consider buying bonds, especially municipal bonds.

You could consider diversifying your investment portfolio with bond funds. This will save you from having to buy bonds outright, which is expensive. Bond funds work like mutual funds in that your investment dollars are pooled with those of others.

Charles Schwab suggests the following:

Assess how much a rise in rates may affect your current portfolio.
Decide whether you want to reduce interest rate risk, eliminate interest rate risk, or profit from rising rates.
Choose the instrument or instruments which best achieve your own hedging objectives.

Think outside the box

CBS News found that online banks are upping their options because they are in the midst of a pricing war "that shows no sign of slowing down." One of the areas in which they are outshining traditional banks relates to interest rates.

As interest rates have risen, they are responding positively to customers. The same is the case for lesser known banks, such as regional banks.

In a report, CBS News states:

And if you are willing to experiment with smaller or lesser known bank brands, it is possible to earn 2.35% percent or more. Synchrony Bank, Marcus (by Goldman Sachs) and Barclays are all well-known names offering 2.05%. Synchrony is a publicly traded company that offers private label credit cards for brands like Amazon.

American Express is infamously known as being for the wealthy. However, it offers a savings account option that may surprise you. The offering earns a 2.10% variable APY. The variable rate option gives savers the flexibility of earning higher interest rates.

Compare rates from online and traditional banks to make sure you're getting the best yield available.

The traditional bank route

Penny pincher Clark Howard hasweighed in on savings accounts and how to choose them by singling out banks. He noted that as banks face increasing competition from online banking institutions, more of them will likely begin to offer higher interest rates on savings.

He says:

In a ‘rising rate environment,' moving your short-term savings to a high-yield account can be very beneficial. However, you don't want to make a decision based solely on the interest rate.

He added that having multiple savings accounts could also be beneficial. Clark notes:

Rather than bouncing around looking for the best rate, you can keep savings in different accounts at different banks — you just need to be able to keep things organized and come up with the best system that works for you.

Having multiple savings accounts can also help if you have more than one savings goal. You can use different accounts to reach each of the goals.

Be careful with CDs and savings accounts

One of the domino effects from rising interest rates relates to cash investments. As the Federal Reserve boosts rates, returns on these investments are likely to rise. Observers say for this reason savers should avoid investing in long-term vehicles like certificates of deposits (CDs).

Don't get caught in the trap of investing in CDs to get a higher return because that may not always be the result.

Also, try to avoid choosing saving accounts based on any bonus rates the bank may offer. Instead, compare the rate histories of the offering banks. Simple Google searches to find savings accounts that are tailored to your needs can help you tremendously.

NBC News reported that people who invest in savings accounts or CDs on the hopes of beating inflation are making a mistake. Invest in these with the understanding that over time, they are going to lose their values.