It hasn't been business as usual for the big banks lately, and not just because of multiple bank failures. From April 2022 to May 2023, total deposits at commercial banks have fallen by just over $1 trillion, according to the St. Louis Federal Reserve. Considering deposits had been rising fairly steadily for the last 50 years up until then, that's a notable shift.
The most likely cause is that consumers can now earn a whole lot more interest by moving their money to high-yield banking accounts. This wasn't the case before, when interest rates were fairly low across the board. But because the Fed has hiked interest rates so much over the last year and change, there's now a huge difference between what traditional banks and online banks offer.
For example, the average savings account APY is 0.39%, according to the FDIC. The average checking account APY is even lower at 0.06%. On the other hand, if you put your money in a high-yield savings account, you could earn 4.50% or more. For $10,000 in deposits, that's a difference of more than $400 per year in interest.
It's a great incentive to rethink where you store your money, if you haven't already. Now, let's look at what the research says to see who is and isn't pulling their money.
Who's pulling their money from traditional banks?
In February and March, 29% of bank customers said they'd moved deposits from their primary bank in the last 90 days, according to J.D. Power as reported by Forbes. Younger consumers were far more likely to have pulled their money.
Among those 40 and under, 38% reported moving money, and they took out an average of 43% of their deposits. Only 23% of those older than 40 moved money, and they moved an average of 35% of their deposits.
Anyone can benefit from putting their cash in an account with a higher interest rate. But right now, there are more millennials and members of Generation Z who are taking advantage of this opportunity.
How to decide where to park your cash
It's good to occasionally review where you have your money to check that you're getting a competitive return. And if you currently have your money in a traditional bank with a low interest rate, then this is something you should change right away.
As far as where you keep your money, there are many options available. Finding the right one will depend largely on how accessible you need that money to be.
For accessibility, consider these options
For cash you could need at any moment, it's best to stick to accounts that let you make withdrawals whenever you want. Options include:
- High-yield savings accounts: These work like any other savings account, but they're offered by online banks, so they have much higher interest rates.
- Money market accounts: These offer interest rates on par with high-yield savings accounts, and they also have the more convenient withdrawal options seen in checking accounts, such as debit cards or checks. The catch is that they often have high minimum deposit requirements.
For longer-term growth, consider these options
If you have money you won't need at a moment's notice, and you'd like to make it grow, the next factor to consider is your timeline. For funds you plan to use within about five to seven years, you may not want to invest in anything that could lose value, such as stocks. Fixed-income products are a good option here, and they include:
- Certificates of deposit (CDs): These have a fixed interest rate and term. You must keep your money in the CD for the full term to avoid early withdrawal penalties. CDs are useful because they sometimes have higher interest rates than savings accounts, and you can lock in that interest rate, which protects you in the event that rates drop.
- Bonds: These are debt obligations you can buy to receive interest payments on a regular schedule. Government bonds, such as Treasuries, are the safest option. There are also corporate bonds issued by companies that want to raise money.
All of the above are good places to put money that you aren't using for long-term investing. That includes your emergency fund and money you're setting aside for any savings goals, such as a vacation or a down payment on a home. No matter how long you end up holding on to this money, it makes sense to earn as much interest on it as possible.
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