NerdWallet's Smart Money Podcast - What the Fed News Means for You, and Choosing a New Bank

Episode Date: October 3, 2022

The Fed has been in the news a lot lately, raising interest rates and causing recession fears. But what, exactly, do the interest rate hikes mean for various parts of your finances, like your savings and credit cards? We give you the rundown to start off this episode. Then we answer a listener’s money question about how to choose a new bank — including how to find one that fits your family’s needs.  To send the Nerds your money questions, call or text the Nerd hotline at 901-730-6373 or email [e-mail]. Timestamps: This Week in Your Money segment: 0:00 - 10:02  Money Question segment: 10:03 - 26:33  Like what you hear? Please leave us a review and tell a friend.

The Fed and its interest rate hikes have been in the news a lot lately, but decoding what it means for you and various aspects of your finances isn't always easy. And that's where we come in. Welcome to the NerdWallet Smart Money Podcast, where you send us your money questions and we answer them with the help of our genius nerds. I'm Liz Weston. And I'm Sean Piles. If you want the nerds to answer your money question, call or text us on the nerd hotline at 901-730-6373. That's 901-730-NERD or email us at podcast at nerdwallet.com. Subscribe to get new episodes in your feed every Monday. And if you like what you hear, please leave us a review and tell a friend. In this episode, we're answering a listener's question about switching banks, including how to find the best bank for your needs. But first in our This Week in Your Money segment, we're talking about how the recent Fed rate hike could impact different parts of your financial life. We'll also touch on whether a recession is on the horizon. So at the Fed's

latest meeting, they increased the benchmark interest rate to 3.25%. And that is the highest it's been in 14 years. Before we talk about how this could affect various aspects of your financial life, I want to talk quickly about what the Fed is and what it does, because I think a lot of folks may not know about this, even though it's been in the news so much lately. So very quickly, the Federal Reserve System is the central bank of the US and their job is to ensure the stability of the economy through, among other things, setting monetary policy. And that basically means what rate banks can lend each other money, among other things. Yeah. And lately, inflation has

thrown off the balance that the Fed strives for. So it's trying to tip the scales in the other direction using one of its tools, a fairly blunt one, raising something called the federal funds target rate. And so basically, after running through the Rube Goldberg machinery of the economy, raising this rate ends up making other interest rates across the economy higher. Yes. And the reason they're raising rates is to discourage people from borrowing money and slow down economic activity. You know, something becomes more expensive, people tend to do less of it. And so that's the way that the Fed is trying to manipulate the economy. Yeah. And in recent meetings, Chairman Powell

has said that he's basically going to cause some pain for regular folks in the economy. He has said in so many words that he wants wages to stay the same or go down at the same time that prices are really high. And so it's basically going to make managing money and using it, borrowing it a lot less fun than it was a year ago. Yeah. And the idea is there's simply too much money floating around in the economy. It's overheating. And what they're really trying to avoid is this mindset setting in,

which set in in the 70s and the early 80s, which is inflation is a permanent part of life. And actually just that attitude can cause more inflation because people are thinking, whatever I'm going to buy is just going to be more expensive in the future. So I'm going to buy it now. And again, all that demand starts feeding into the inflationary cycle and just makes it worse and worse and worse. Right. Whereas if folks think this will just be a short term issue that can become a self

fulfilling prophecy in its own right. And that can help slow down inflation, actually. Yeah, it's really weird how much of this is psychological. You think everything the Fed does is going to be nuts and bolts kind of monetary stuff. But really how we feel about it and the actions we take based on our psychology and the psychology of money play a big part in this. Yeah, it turns out money is just a big societal group delusion. So speaking of group delusions, let's talk about the stock market because the stock market has not been having a good time as a result of these increases in interest rates. So typically higher interest rates can mean the cost of doing business is more expensive. That can lead to lower revenues and profits, which slows growth. And that's something that makes the stock market very sad. Yes. And higher interest rates are

typically not good for bonds. If you have investments, then you're seeing this in both sides of your portfolio. And we're going to continue to feel the pain that the stock market is feeling in our own personal portfolios. So my piece of advice is remember that investing is a long term goal. There will be ups and downs. So the best thing that most folks can do, according to financial advisors, is ride this out and check on your asset allocation. Yes, I have been ignoring my retirement account because I just don't want to see it right now. Yep, same. Yes, I have been ignoring my retirement account because I just don't want to see it right now. Yep, same. Well, I also want to talk really quickly about crypto because earlier this year, it was in the news a lot, but we haven't heard about it so much lately.

And as of this recording, one Bitcoin is valued under $20,000. And that is down from a high of over $65,000. So it looks like people are fleeing to more secure and less speculative investments. Oh, I hate to see this. But on the other hand, maybe it's a little bit healthy because crypto was just going nuts. And people had this idea, it would never go down. And yeah, not true. It's much more volatile, even than the stock market. So maybe we had to go through this for people to get that lesson. Well, the crypto market hadn't been through a tough economic time like this before. So now we're really seeing how the crypto market plays out when things are a little bit less stable. Well, maybe we should talk about

what the rate hikes mean for our savings accounts. Higher interest rates basically mean the annual percentage yield or APY on savings accounts go up. And in fact, they're at their highest in recent years, especially high yield savings accounts. One thing I will note though, is that rates tend to go up slower for savings than they do for borrowing. So it's taken a while for these rate hikes to work their way through. Yields on certificates of deposit and money market accounts have also gone up, but these investments or these places to park your money are not going to keep up with inflation. If you add in inflation and taxes, basically your savings is losing ground over time.

Your buying power is eroding over time. However, you can get a much better deal with a high yield savings account than you can from a standard brick and mortar savings account. So it's definitely worth shopping around and getting your money into something that's giving you a better return. And as we'll talk about a little bit later, now is a really good time to increase your savings if you have the means to do so. Yeah, because we don't know what's going to happen in the future with the economy. Right. I also want to talk about what higher interest rates mean for debt. Basically, debt is getting more expensive. The average interest rate on a credit card is now around 18%. As of this recording, that's also the highest in many years. And rate hikes can mean even higher interest rates on credit cards. And that's usually reflected in a billing cycle or

two. So it happens quite quickly. Auto loans are also likely to get more expensive. We've seen that happen lately. And variable rate debt, like on a HELOC or a mortgage without a fixed interest rate will get more expensive too. So if you can right now, I would say focus on paying down expensive variable rate debt, like credit card debt. Think about consolidating debt if you have it. If you have multiple different credit cards that have pretty high interest rates, consider looking into a personal loan to see if you can get all those bundled into one with a lower interest rate. And as I always like to mention, talk to a credit

counselor because they can give you free budgeting help as well. Yes. And I just had a conversation this weekend with a relative and we were talking about the federal rate hikes. And the first place he went was mortgage rates, that mortgages are getting more expensive for homebuyers. There's not a direct correlation, but there is a correlation there. And that's one of the most common misconceptions. People think that when the Fed raises their rates, that means that mortgages will also get more expensive because of that. And the answer is like, yes and no. It's not a direct connection. But as we've seen lately, interest rates on 15 and 30 year mortgages are at their highest since 2008. We saw them at over 6% in September. Ouch, which is making home buying a lot more expensive,

knocking home buyers out of the market. And you're seeing a lot of once super hot markets cool down a bit. Yeah, but the trade off is if you are dedicated to buying a house right now, you are likely to see less competition. And houses themselves might get a little bit less expensive than they were a year ago, even though again, with that high interest rate, you're going to be paying more for it. The other thing you're going to hear about is recession, that these higher interest rates are going to slow down economic activity so much that we go into a recession, which is where the economy actually shrinks rather than continuing to grow. And reading between the lines of the latest Fed meeting, it does seem like they

think a recession is increasingly likely. We haven't really heard much about that soft landing lately. Unemployment is likely to increase going into next year, according to the Fed. And now is a really good time to shore up your finances in the event that there is actually a recession. That means building up your savings, paying down or consolidating debt, and continuing to take steps to trim your expenses. Right, there's only so much we can control in our financial lives, but I would say make the most of the time we have right now

before we're actually fully in a recession, or at least an official recession. So really build up your savings if you can, that will give you more flexibility in the event that you are laid off. Try to make the debt that you do have more affordable so it fits within your budget and try to generally wade your way through

the inflation that we've been seeing by shopping at places that might be less expensive. Well, I think that covers it for now. Let's get on to this episode's money question segment. All right, good. This episode's money question comes from Mel in Maryland, who sent us an email. They wrote, Hey, nerds, I'd like your advice on banking. I've been with my bank for decades, but I'm not sure it's the best fit for me. I'm considering

finding a new bank, especially because I know it's time to find a good high yield savings account. What should I be looking for? Is it better to keep your long term savings in another bank so it's not as easy to access and just have direct deposit? Is it better to have all of your accounts in one place? If high-yield savings account rates can vary, what other things should I be considering in finding a bank solution that works for me and my family? Any help is appreciated. To help us answer Mel's question on this episode of the podcast, we're joined by banking nerd Margaret Burnett. Welcome back to Smart Money, Margaret. Hi, thank you for having me. I'm glad to be back. Margaret, over the past few years, high yield savings account has been kind of a misnomer,

but that is starting to change, thankfully. What kinds of rates can folks expect if they shop around and what sort of banks offer these good rates. Okay. Yes, that's very true. But rates are increasing. And these days you can find rates, APYs, annual percentage rates above 2%. So say you have $5,000 in a savings account that earns 2% APY. After a year, that would earn just over $100. Not bad. So yeah, the national average is 0.13 percent. Oh, wow. So if you plug in that number, it would earn about $5. Oh, okay. That's a tremendous difference. NerdWallet has a savings calculator that you can plug in numbers just to see what different amounts can earn at different rates over time. Okay.

And are we expecting to see rates climb maybe even above 2%? Because that's what it is as we're recording this right now. But maybe in a couple months, could it be higher? It's very possible. A lot of it is tied to the Fed rates. And if those rates increase, then you could probably expect to see APYs and some of the top savings rates increase as well. Okay, we need to say the obvious, which is these are much better rates than they used to be, and worth shopping around to find them, but they're still trailing inflation. So

you don't want to put all your money in a savings account because you're losing ground, but you still need to have money in like an emergency fund, other places where it's liquid and accessible. And that's where a high yield account can be really, really helpful. But is it just online banks that offer the best rates? Can you find good rates at say credit unions? Well, online banks do have an advantage because they don't have some of the same expenses as traditional banks and even credit unions in that they're paying for brick and mortar branches. So you do see that online banks tend to pass that savings on to customers in the form of higher rates.

Some credit unions do have rates that are better than those that are offered by the biggest banks that are out there. But because of the expenses that the credit unions have and having to pay for branches, many of them still have low rates. Got it. Our listener asked whether it's better to keep all of your bank accounts in one place. Can you talk about the advantages and disadvantages of a savings account that's at a different bank than your checking account? And how do you handle that personally? The number one advantage is that you are earning the highest possible rate. I found that as rates increase, these high yield accounts are also more likely to automatically

increase their rates too. So you could be earning more just for looking around one time and putting your account there. Another advantage may be just kind of behavioral. If your money is in savings, it's out of sight, out of mind. So you may be less likely to overspend it or splurge it if it's not right there, very easily accessible. In addition, with features like direct deposit and automatic transfers, you can make saving be automatic. So you set it up and you forget it. And then it doesn't really matter as much whether the account is in one bank or in two banks because the savings is automatic. Likewise, though, there are some disadvantages.

So it takes time to set up. It takes time to set up those automatic transfers. And there is the fact that you have an additional account to keep track of. So you do have to keep that in mind if you're willing to do that. In addition, some online savings accounts might not come with an ATM card. So if you need to withdraw funds, you have to set up a transfer or maybe get a wire transfer. Right. See, for me, I actually view that aspect of it as a potential advantage because it's a little bit harder to pull out savings in a pinch.

And you can get it if you need it, but you're less likely to do an impulse withdraw because you can't physically get it as easily as maybe from your checking account. Yeah, because it takes a couple of days for the money to go back and forth. Yes, exactly. So you have to decide for yourself if that's an advantage or a disadvantage. Once again, savings out of sight, out of mind, you're less likely to overspend. So for me personally, I do have separate high yield savings accounts for emergencies than where I keep my regular checking account. So for me, it's worth it. Again, once you do the set it and forget it, it makes it a lot easier to save. Right. And Liz, I know you and I are huge proponents of savings buckets.

Yes. Can you tell me how many accounts you have right now? I have lost track. I think it's around 10. My bank allows me to put labels on each of these. They call them savings sub-accounts. So I have a certain amount for property taxes, life insurance, the holidays and vacations, clothing. I also have an oops fund, which is where I get some sort of stupid charge, like, I don't know, a parking ticket. It comes out of the oops fund, makes me feel better. I like that name for it. Yeah. Well, they wouldn't let me use my first choice, which was like, oh, blank. So that was my second choice. Anyway, it really

helps to have those because mentally I've got the money accounted for and I won't go dipping into something that's intended for another purpose. It really helps me make sure that the money is there when I need it for the purposes that I set up. And Sean, you have something similar, right? Yeah. I was wondering whether I had surpassed you in terms of number of accounts, but you still have me beat. I have eight different accounts right now. And that's across three different banks. I have accounts at one bank that I've had since high school, where I basically just pay my mom my cell phone bill from that my portion of the cell phone bill rather. And then I have five different accounts at an online bank that gives me a high yield, which I really appreciate. And I have many different savings goals within that. So one is for a fence. I've been saving up for this for probably a year and a half at this point. And then I have my emergency fund in there. I have my version of the oops fund, which is just called life happens.

And then I have also a car fund in there, which will be for future car maintenance, or maybe even a down payment on a future car. But then when it comes to day to day spending, I use my checking account at my local credit union. And for people who aren't familiar with online savings accounts, they typically don't have minimums or account fees. You probably wouldn't want to do this at a traditional brick and mortar bank because every new account you set up could cost you more money. But with these online accounts, it's really easy to do and it doesn't cost you a ton of money. In fact, it usually doesn't cost you anything at all. Right, exactly. And I'll also say that I am

a fan of savings buckets. I like them a lot, but I also tend to use mobile budgeting apps that can kind of help me divide some of the savings that way so that I don't open as many. That's just a personal preference though, Liz. You bring up a good point about how with the savings accounts, with online accounts, you don't usually have minimums or monthly fees. So you can open up as many as you need, even if your financial institution doesn't have savings sub-accounts or savings buckets. One more thing about having more accounts or we're dealing with more banks. If you can keep track of all this money, that's great. And I feel pretty competent to do that now. But I know as we get older, really good idea to simplify and not have your

accounts scattered everywhere. It's just too easy to lose track. So, you know, if you're heading towards retirement age, maybe think about consolidating your accounts at one bank. But it is fun when you're younger to go after all the pennies, sometimes you get paid extra to open an account or you get a higher interest rate, whatever it is. So as long as you can make it work, whatever you want to do is great. I'll say the same is true for those who are new to having online bank accounts, you can just start with one simple account, have your direct deposit set up, so you're building money over time. And then as you feel secure using a new bank like this, that's when you can begin to open maybe a second or a third account for different savings goals,

as feels appropriate for you and your life goals. Yeah, good advice. Margaret, how do folks go about opening a new account if they maybe haven't done so recently? Opening an online account has an advantage because you don't have to leave your home to establish one. But you will likely need your social security number or taxpayer identification number and also information from another form of ID, such as a driver's license. You submit the money in, and then you can expect to transfer that money in after the online account has been approved and opened. Before the financial institution opens an account, they will likely work with a third party to verify your identity and also look for fraud markers. We have heard from readers, unfortunately, who've had online accounts closed

and they never understood why or their applications were not approved for being opened. Others have tried to open an account online at an institution that did have bank branches and they were asked to come by the branch to verify their identity or verify some information. So that is something to keep in mind as you seek to open the account. If everything goes well, then the account can be opened and established within a matter of minutes or a couple of days. It may be difficult, though, to prove your identity if you don't have a large banking history. So say you're a teen and it's your first account or you're a new citizen and you don't have a long established banking history here. So those are some things to keep in mind. So Mel mentioned banking for

themselves and their family. Are there any special considerations for family banking versus single people? Yes, there are some. You'll want to check the bank's policies about opening a joint account. Some savings accounts may not be able to be opened as joint accounts. You might just have to open one for yourselves. Other institutions market specifically to kids with their parents or guardians being the ones that open the account. And those particular savings accounts may also offer features such as budgeting applications that are kind of fun and tied into the account, or maybe even high teaser rates, a very high APY for say the first few hundred dollars that are saved in that account. I will say that you don't have to go to an account

that's marketed for kids or for couples. The best savings accounts, as we talked about earlier, tend to have good rates and no service fees. Or if they do have service fees, they may be able to be easily waived. For example, if you sign up for direct deposit, or if you keep a minimum balance that that's reasonable, that might be a good savings account to look at as well. Margaret, a lot of folks are probably listening to this and thinking, I've had the same bank account for years, and it gets the job done. So why would I go through the hassle of shopping around and signing up with a new bank? What's your answer to that? Well, if you switch to a high yield account, now, you might not have to worry

about doing it again, if rates increase. And if they do increase in the future, your bank may choose to raise those rates as well. So maybe that one switch can actually set you up for several months or years of earning higher rates than you normally will. I found that in my research that the best savings accounts tend to be the first to increase their rates when the Fed increases rates. And so they are likely to do it if there are future rate increases. And, you know, it's a question. It may seem like a hassle now, but would you take a few minutes to possibly get hundreds of extra dollars later, as we talked about calculating how much your money could grow over a year.

The last thing I'd say is, you know, it doesn't have to be an either or situation. You don't have to necessarily close your existing account. You could start with the opening the new one, which could take just minutes to a couple of days, and then see how that goes. And you could choose to close your other account later, or keep it open. Yeah, I think your point about not having to worry about finding a high yield savings account in the future, if you have one now is a really good one. And it makes me think about my experience with my high yield savings accounts, because I opened one shortly after joining nerd wallet, which was over six years ago at this point. And there have

been times throughout those several years where I've thought about joining a different bank because maybe they had a better app or at that precise moment where I was thinking about it, their high yield rate was slightly better than what my bank offered. And then when I looked into it more, my bank caught up within a week or two to that yield rate. And I found that the app services that I wanted from my bank were sufficient. And I ended up just sticking with it. And so the point being, when you get into one of these banks, you'll find probably that it will just suit your needs for years and years. And you can continue to use it and save money and grow and not have to worry about whether you are in the best banking situation for what you need.

Exactly. Yeah, really good point. Well, Margaret, do you have any final thoughts for those who are maybe thinking about getting into the high yield account game? Well, I'll just say to take some time and plug in some numbers in the savings calculator. We have calculators on the Nerd Wallet site that can help you see how much money you can earn after a year. There's also a compound interest calculator because your interest can actually earn after a year. There's also a compound interest calculator because your interest can actually earn interest over time and that can build your bank balance even more. So a compound interest calculator can help you figure out how much your money can build over time. In addition, we have articles that we call roundups that list the top savings accounts that we tend to see. And we update these monthly. And sometimes you'll see some of the same ones kind of round out the list because they

really do have high rates. But if you want to shop around, that would be a good place to start. Great. Well, thank you so much for talking with us. Thank you again for having me. And now let's get on to our takeaway tips. Liz, do you want to kick us off? Yeah. First of all, shop now. Rising interest rates mean you can earn significantly more from a high yield savings account. Next, saving doesn't have to cost you.

The best savings accounts have high rates and no or often waived service fees. Finally, you don't have to choose. If you open a new savings account, you don't have to choose. If you open a new savings account, you don't have to close your old account immediately or ever. And that is all we have for this episode. Do you have a money question of your own? Turn to the nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD.

You can also email us at podcast at nerdwallet.com and visit nerdwallet.com slash podcast for more info on this episode. And remember to follow, rate and review us wherever you're getting this podcast. And here's our brief disclaimer thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This nerdy info is provided for general educational and entertainment purposes and may not apply to your specific circumstances. This episode was produced by Sean Piles and myself. Kaylee Monaghan edited our audio and Jay Bratton wrote our show notes. And major thanks to the

NerdWallet copy desk, those heroes, for all their help. And with that said, until next time, turn to the nerds!