The Waiting Game: Why ‘FOMO’ Over Higher Rates Is Impacting Your Savings

Since spring, deposit interest rates have been increasing daily. This includes what banks and credit unions pay for things like savings accounts, money market accounts and CDs. Following the Federal Reserve’s 0.75% increase in July, many experts are predicting further increases throughout the year starting with the Fed’s September meeting. This spells out good news for consumer deposits as banks, in turn, typically make retail accounts more attractive. Many savers may be convinced to wait for further interest rate jumps before investing their money on a fixed basis for a longer period. But, is that costing you more in the long run? Raisin, the marketplace for high-yield savings products, shows how savers can profit effectively and stop the fear of missing out (FOMO) on some hypothetical future earnings potential from eating into the interest they could be earning now.

The Federal Reserve has most recently increased its rates by 0.75%, taking the base rate to a target range of 2.25% to 2.50%, marking one of the quickest increases on record over a 6-month period. This latest interest rate hike reflects the Fed’s efforts to control inflation amid the current global economic issues eating into consumers’ spending power. With the Fed targeting to keep US inflation at 2%, but running nearly three times higher at 8.3% as of August 2022, experts have warned that the current series of interest rate increases may reach, and be held, at 3.5% in a bid to flatten this inflation curve. In theory, the rise in the Fed’s rates should be good news for savers. However, as rates are rapidly rising and the temptation to “wait out” for a better rate likewise increases, consumers are effectively eroding their current savings by not acting to offset the effect of inflation.

A simple example shows how much money can be lost through indecision: Anyone who wants to save $10,000 by summer 2023 could currently invest the money at an interest rate of 3.00% APY for 12 months and would end up with $304.53 in interest. However, if you wait another six months for the banks' next interest rate steps and then invest the savings for six months, you would only receive a return of $189.26, even at a higher interest rate of 3.75%. - a whole $115.27 less. That means you missed out on 61% more in interest earnings by waiting.

For interest earnings of roughly $300 on a $10,000 principal amount over six months, the interest rate would have to exceed 6.00%, meaning it would have to double from 3.00% over the time period during which you waited to save.

So for indecision, or deliberate inaction, to pay off, very large interest rate increases are needed. If it is clear that your cash reserves will not be needed for necessary expenses in the next 12 months, it is almost always more lucrative to invest them directly in a high-yield deposit account, such as a fixed-term CD. For more flexibility, a no-penalty CD is another option.

The ladder, or staircase, strategy offers savers a way to tap the most attractive fixed interest rates over a time period of rising rates. You save money over the long term with different maturities, thus bridging the waiting period for higher interest rates.

The ladder strategy works quite simply: An investment sum of $10,000 is divided up and $2,000 each are invested at fixed interest rates through CDs with terms of 1, 2, 3, 4 and 5 years. After just one year, the first investment amount, including accrued interest, is paid out and can then be invested again at the highest interest rate. In the following year, the two-year term deposit is due, and so on.

With the ladder strategy, savers take advantage of rising interest rates without having their money parked in checking accounts for months on end, earning no income. Alternatively, consumers looking for quick access to savings in their first year, again, can utilize no-penalty CDs - providing security that they can access their money whenever they want.

“It doesn't pay to wait when it comes to saving. Even if interest rates continue to rise, consumers should take action now,” says Ben McLaughlin, President of Raisin. “US consumers keep billions of dollars sitting in very low- to essentially no-interest-bearing accounts, like checking accounts, where inflation hits full force and the money loses value. With the ladder strategy, interest can be earned quickly and still take advantage of future interest rate increases. Those who need the money in the short term can make it work for them in a high-yield savings account, and for those looking for a longer term strategy, traditional and no-penalty CDs are an excellent option.”

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