How Your Savings Can Benefit From Higher Interest Rates In 2023

The Fed has hiked rates aggressively. That’s created pain for a lot of investments, but a silver-lining for savers, who can now expect meaningful interest on lower risk deposits into 2023. Here are some ways to take advantage of that.

Higher Rates For 2023

For the past decade, short-term interest rates have been low and often practically zero. Rates did rise prior to the pandemic, but never hit 3%. Now rates could rise closer to 5% in 2023 depending on what the Federal Reserve decides at its upcoming meetings.

This change mean it now makes sense to consider how your short-term funds are invested to earn interest. Previously, there was little point in hunting around for attractive interest rates for savings products. Not any more.

U.S. Short Term Interest Rates Over The Past Decade

Shopping For Attractive Rates

Perhaps the simplest way to take advantage of this move in rates is to shop around with your bank account. A number of providers have FDIC-insured products currently paying 3% or more, these currently include Capital One
COF
, LendingClub, CIT Bank, PNC Bank and Marcus. This isn’t an exhaustive list and rates change daily.

This is a simple way to put your money to work at low risk. Although rates have moved higher, not all banks have passed on the benefits to customers in basic savings accounts. Depending on the amount you have saved it may be now worth the effort to evaluate your options and make a move. If you have a $20,000 balance, these rates could earn you around $600 a year.

ETF Options

If you want to invest money in the markets to take advantage of increasing rates, there are several options. However, these are not risk free depending on how rates move in future.

Vanguard offers the Vanguard Short-Term Treasury ETF
VGSH
that holds a range of short-term U.S. government bonds with an average duration of just under 2 years. This currently has a yield of just over 4.5% and has a relatively low expense ratio of 0.04%. However, this isn’t without risk. The fund lost money so far in 2022 as rates rose. Still, it’s among the more conservative bond fund options and offers a higher yield than many bank accounts.

As an alternative, iShares offer the iShares Short Treasury Bond ETF (SHV
SHV
) that has an even shorter duration than the Vanguard fund, and fared better in 2022 as a result. It currently yields just over 3.8% but the expense ratio is higher at 0.15%.

Treasury Direct

You can also buy bonds directly from the government through its Treasury Direct website. Though a little more cumbersome to use, this can avoid some of the fees and expenses associated with brokerages and ETFs.

Here you can consider I Bonds which pay interest directly related to the rate of U.S. inflation. Currently, I Bonds are paying almost 7% in interest until April of 2023, but that rate may decline if inflation comes down.

TIPS

Another interest option for staying ahead of inflation are TIPS (Treasury Inflation Protected Securities) these pay interest at a rate linked to inflation.

For many years, TIPS have paid an interest rate below the level of inflation. In 2022 that has changes and various TIPS now offer a premium over the rate of inflation. The Treasury tracks real yields here which generally correspond to what TIPS are paying.

TIPS currently pay interest that’s a little over 1% above the rate of inflation. Of course, that rate can change and prices of TIPS can fall. Vanguard offer a Short-Term Inflation-Protected Securities ETF as one way to get access to this asset class, which currently give you an opportunity to grow your savings faster than inflation with relatively low risk.

Your Savings Options

With rising rates, you now have more options to earn money on your savings. Sadly, with inflation running at around 7%, these may not mean you come out ahead after the impact of higher prices, but does mean you earn more than zero on your money.

The lowest risk option is to shop around for a better interest rate on an FDIC-insured bank account where its possible to earn 3% or more currently. The Treasury’s I-Bonds can also be an interesting option via the Treasury Direct platform with interest tied to inflation.

If you are comfortable with a little more risk, then short-term government bonds or TIPS can be interesting options to consider and can offer rates in the 3% to 5% range today, though these yields will change over time with market movements and these investments can lose money.