Interest rates hiked, stocks declined, banks failed. Here’s how to protect your money

The Federal Reserve central bank recently indicated a pause in the current rate-hiking cycle. The board’s actions, which raised interest rates from near-zero percent starting in March 2022 to over 5% in its most recent meeting in May of this year, have been unprecedented.

Inflation was out of control in 2022. While economists, politicians and everyday Americans debated the policy, the outcomes — particularly the negative ones — have been significant.

Stocks, led by technology and growth companies, declined sharply as the future value of their earnings were discounted again after more than a decade of near-zero interest rate policy. Bonds and CDs, which were meant to provide investors safety, saw a once-in-a-generation slump. Mortgage rates soared. Most economic data, except for the labor market, indicated economic contraction. We hear about these negative outcomes every day. There is a silver lining.

For the first time in more than a decade, you can earn meaningful interest on cash and cash equivalent investments like money markets and CDs. The iPhone was just over 1 year old the last time money market rates were consistently above 3%. Let’s review the basics of maximizing the interest you can earn on your cash savings.

The first step is to segregate your cash into two buckets. The first bucket is for daily needs. It receives income regularly and is depleted regularly for everyday expenses. This is typically a checking account that likely pays very little interest, but don’t worry because you are going to keep its average balance relatively low.

The second bucket is excess cash held for periodic use like vacation funds, insurance costs, tax needs and emergency funds. It can be held in savings accounts to earn interest. These savings accounts include high-yield savings, money markets and certificates of deposit.

However not all banks are created equal. Different banks offer different interest rates on their savings accounts. Shop around. Often you can find the best rates at online banks or local institutions rather than the traditional large retail banks.

The advent of smartphones and mobile banking has made establishing a new account very simple. Once your new interest-bearing account is set up, you can link it to your checking account. Within a few days, or sometimes instantaneously, you can transfer funds back and forth between your checking account (earning no interest) and your new savings account.

At current rates of 5% you can earn $500 in interest on $10,000 held in reserves annually. That’s real money that compounds over time.

Here are a few pitfalls to avoid:

▪ Check all your current accounts to make sure they are paying you the interest you expect. Banks won’t alert you to alternative accounts that fit your needs and pay you higher interest. You must be proactive and review your accounts to find the best rates available.

▪ Watch out for restrictions. Money market accounts commonly limit you to six withdrawals or transfers in a month. If you exceed this number they can automatically transition you to a different account type that has unlimited transactions but with low-to-no interest earned.

▪ Lastly and importantly, be aware of FDIC insurance limits. We have experienced several high-profile bank failures. There is elevated concern for the health of banks. While the FDIC moved to protect all borrowers, insured and uninsured in the case of Silicon Valley Bank, there is no guarantee they will do it again.

Current FDIC insurance limits are $250,000 per depositor per institution per ownership category. However, there are many sound banks to spread your funds around, earn good interest, and stay fully insured.

Inflation and the subsequent Federal Reserve rate hiking cycle inflicted financial pain to individuals and institutions alike over the past 12 months. But by being proactive you can take advantage of the silver lining on the rising interest rate cloud.

Pat Amey is a Certified Financial Planner professional and a member of the Financial Planning Association of Greater Kansas City. He is an adviser with FAS Wealth Partners in Leawood.