Your money could be earning 2,000% more interest right now

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Lauren Williamson is the Financial and Home Services Editor for the Hearst E-Commerce team. She previously served as Senior Editor at Chicago magazine, where she led coverage of real estate and business, and before that reported on regulatory law and financial reform for a magazine geared toward in-house attorneys. You can reach her at lauren.williamson@hearst.com.Hearst Television participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This may influence which products we write about and where those products appear on the site, but it does not affect our recommendations or advice, which are grounded in research.Mobile app users, click here for the best viewing experience.The 2000s are alive and well in both Gen Z fashion and a tiny corner of the banking industry: interest rates on certificates of deposit (CDs). Rates on the best performing 1-year CDs topped 5% in February for the first time since the mid-2000s, making it an excellent time to open one, if you can afford to park your cash for a while. Interest rates on CDs and other types of savings tend to rise when the Federal Reserve raises its target funds rate — that is, the rate banks charge when lending to each other. In its ongoing battle against inflation, the Fed has raised interest rates on federal funds eight times since last spring. Another hike is expected on March 22. While the Fed doesn’t control interest rates on consumer financial products, its actions do influence them. As a result, interest rates tend to rise across the board whenever the Fed hikes rates. This has been bad news for people who need to borrow money (interest rates on mortgages, for example, have skyrocketed), it’s been excellent news for savers who are savvy enough to shop around for the best interest rates.This time around, rates on traditional savings accounts haven’t risen as much as you’d expect, considering the Fed’s aggressive measures. The average interest rate on savings accounts was 0.23% as of February 22, according to Bankrate. That’s not the case for high-yield savings accounts and CDs, however, both of which are delivering their best returns in years. In fact, the rates on the best CDs right now are more than 2,000% higher than the average interest rate for savings accounts.What are today’s CD rates?According to Bankrate, the average CD rates for the week of March 1 are: 1-year CD rate: 1.58%5-year CD rate: 1.20%1-year jumbo CD rate: 1.67%5-year jumbo CD rate: 1.25%Money market account rate: 0.31%That being said, if you’re willing to shop around — and especially if you’re willing to consider an online bank, you can find CDs with interest rates that are much higher.PHNwYW4+PC9zcGFuPjxzY3JpcHQgYXN5bmM9InRydWUiIHNyYz0iaHR0cHM6Ly9zdGF0aWMubXlmaW5hbmNlLmNvbS93aWRnZXQvbXlGaW5hbmNlLmpzIj48L3NjcmlwdD48ZGl2IGNsYXNzPSJteUZpbmFuY2Utd2lkZ2V0IiBkYXRhLWFkLWlkPSIwN2ZiOTg4My0yNzgwLTQ3MjItYmIzZi1mMjBhZWEwYWM1ZWEiIGRhdGEtY2FtcGFpZ249ImhlYXJzdHR2LWNkLW11bHRpIiBkYXRhLXN1Yi1pZD0iaHR0cDovL3d3dy5rY3JhLmNvbS9hcnRpY2xlL2NkLXJhdGVzLWhpZ2hlc3QvNDMxNjMxNzgiPjwvZGl2Pg==How a CD worksWhen you commit to a CD, the bank is also making a promise: that it will honor the same interest rate for the length of the term. Terms typically range from one to five years (though you can find CDs with terms as short as three months). In most cases, you’ll find the best interest rates on CDs with longer terms, though at the moment many of the best rates are on 1-year CDs.Once you put your money in a CD, you must leave it there for the length of the term or you’ll have to pay a fee for taking it out early (known as an early withdrawal penalty). You also can’t add to it once the term starts. So before locking any of your money in a CD, you’ll want to be certain you can afford to part with it for that long. That’s why most people will have a mix of CDs and savings accounts, which let you withdraw money when you need it.CDs are a low-risk way to grow your savings, aside from the risk you might incur by locking your money in one place for a specific length of time. CDs are insured up to $250,000, as long as they’re with a bank that’s insured by the Federal Deposit Insurance Corp. (FDIC) or a credit union insured by the National Credit Union Administration.Once your CD matures (that is, reaches the end of its term), you will typically have seven to 10 days to decide what to do next. You can renew the CD at the current rate, withdraw the money, or move it to another account or CD. If you do nothing, most banks will renew the CD for the same term but at the current rate, which might be higher or lower than the rate when you originally took out the CD. How a high-yield savings account worksHigh-yield savings accounts are another option for growing your money with better interest, in a relatively risk-free way. They function much like a traditional savings account: Money that you deposit earns interest, also called the annual percentage yield, or APY. That interest can also be compounded, which means that over time, you earn interest on the interest that’s been added to your account. (Worth noting: Interest rates on savings accounts aren’t fixed, so ones that are up now could eventually go down.)The primary difference between a high-yield savings account and a traditional account is the amount of interest you can earn. Online banks, which tend to offer the best interest rates, don’t have the same overhead as brick-and-mortar banks. They pass that savings on to customers in the form of higher interest rates. As long as the bank is FDIC insured, it doesn’t matter if it’s a traditional bank or online bank; your money is protected up to $250,000 per depositor, per account type. (Use the FDIC BankFind tool to check.) Just like traditional savings accounts, some high-yield savings accounts require a minimum balance in order to earn interest or avoid fees. You may also find a limit to the number of withdrawals you can make each month, although you can withdraw more freely than you can with a CD. However, you can add as much money as you want, whenever you want.Interest rates are one of the best tools banks have for gaining new customers. If the Fed continues raising the interest rate at the central bank, as expected, it will likely make that competition even more intense. So while it might sound intimidating or time-consuming to research interest rates and switch banks, the payoff for your savings could be big.PHNwYW4+PC9zcGFuPjxzY3JpcHQgYXN5bmM9InRydWUiIHNyYz0iaHR0cHM6Ly9zdGF0aWMubXlmaW5hbmNlLmNvbS93aWRnZXQvbXlGaW5hbmNlLmpzIj48L3NjcmlwdD48ZGl2IGNsYXNzPSJteUZpbmFuY2Utd2lkZ2V0IiBkYXRhLWFkLWlkPSJjYjdiMTc1Yy03YjU2LTRmY2QtODVjZS1kYjcxNjJmZDhmM2UiIGRhdGEtY2FtcGFpZ249ImhlYXJzdHR2LXNhdmluZ3MtbXVsdGkiIGRhdGEtc3ViLWlkPSJodHRwOi8vd3d3LmtjcmEuY29tL2FydGljbGUvY2QtcmF0ZXMtaGlnaGVzdC80MzE2MzE3OCI+PC9kaXY+Pros and cons of CDsBecause a CD is a commitment, you’ll want to consider how it fits into your personal financial picture. ProsHigher interest ratesA safe way to save moneyFixed interest rate, so it will stay the same for the term even if the market shiftsYou can predict how much your money will growConsLocked in for a specific amount of timePenalties for early withdrawalsThe fixed interest rate can turn into a negative if rates on other types of savings accounts go up during the termLower return over the long-term than you’d get from investing in the stock marketWhere are interest rates headed next?Based on the recent price data and a surprisingly strong January jobs report, some experts now believe there’s much more work to go in the fight against inflation. Unemployment fell to 3.4% in January, the lowest it’s been since 1969. That’s great news for workers, of course. But it’s a sign to the Fed that it might be necessary to push the benchmark borrowing rate above 5% before inflation fully eases.Powell struck a moderate tone February 7 at an event at the Economic Club of Washington, DC, a week before the latest consumer price data release. “There has been an expectation that will go away quickly and painlessly — and I don’t think that’s at all guaranteed; that’s not the base case,” he said. “The base case for me is that it will take some time, and we’ll have to do more rate increases, and then we’ll have to look around and see whether we’ve done enough.” The minutes from the February 1 meeting of the FOMC also indicate that Fed officials believe several more rate hikes will be necessary to cool inflation to its target annual rate of 2%.So what’s that mean for your money? More rate hikes from the Fed will likely push interest rates on CDs — and high-yield savings accounts — even higher. That means it’s the perfect time to shop around and make sure your money is working as hard for you as possible.PHNwYW4+PC9zcGFuPjxzY3JpcHQgYXN5bmM9InRydWUiIHNyYz0iaHR0cHM6Ly9zdGF0aWMubXlmaW5hbmNlLmNvbS93aWRnZXQvbXlGaW5hbmNlLmpzIj48L3NjcmlwdD48ZGl2IGNsYXNzPSJteUZpbmFuY2Utd2lkZ2V0IiBkYXRhLWFkLWlkPSIwN2ZiOTg4My0yNzgwLTQ3MjItYmIzZi1mMjBhZWEwYWM1ZWEiIGRhdGEtY2FtcGFpZ249ImhlYXJzdHR2LWNkLW11bHRpIiBkYXRhLXN1Yi1pZD0iaHR0cDovL3d3dy5rY3JhLmNvbS9hcnRpY2xlL2NkLXJhdGVzLWhpZ2hlc3QvNDMxNjMxNzgiPjwvZGl2Pg==Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.This article was first published on SFGate.com and reviewed by Jill Slattery, who serves as VP of Content for the Hearst E-Commerce team. Email her at jill.slattery@hearst.com.

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