Investing in certificates of deposit is typically an excellent way to boost your savings without taking on risk. CDs tend to offer higher interest rates than savings accounts in exchange for keeping your money in the bank for a set amount of time — typically, for months or years. Unfortunately, the current economic environment has caused rates to considerably drop. That doesn’t mean that CDs are now a bad option for savers. Here’s a look at why CD rates are so low and what you can do to make the most of low CD rates.

Why are CD rates so low?

The coronavirus pandemic played a large role in why CD rates have dropped this year. In March of 2020, the Federal Reserve announced it was lowering the target range for the federal funds rate to 0-0.25 percent in a bid to stimulate economic growth in the United States.

A byproduct of this move was widespread lowering of interest rates on deposit accounts, including CDs, by financial institutions. Even online banks, known for offering higher rates, have lowered their rates. CD rates are likely to stay low until the U.S. economy recovers, which could take a while.

People who opened CDs before the Fed lowered rates were smart to lock in higher rates, especially those with longer CD terms. If that wasn’t you, it’s OK. While it’s not the ideal time to build up savings through high-yield interest, there are some options to make the most out of low-rate CDs. While the best moves to make depend on your goals and time horizon, here are a few options to consider.

Choose short-term high-yield CD rates

The highest CD rates are typically reserved for long-term CDs. Many banks offer CD terms as long as five years, with some banks offering 10-year terms. In a low-rate environment, though, your best bet is investing in short-term CDs that offer competitive yields, recommends Natalie Briaud Pine, CFP, lead adviser and managing partner at Briaud Financial Advisors.

“We would advise keeping the duration low because when interest rates go back up, you will want to capitalize on the increase in rates,” Briaud Pine says. She recommends looking at CDs with maturities of one to two years.

There’s always a small chance that you could miss out on some savings opting for shorter CDs, but it’s minimal. “The benefit of rolling into a higher rate in the future is high, thus the reason for recommending keeping the length of time you hold the CD low,” Briaud Pine says.

Opening a CD with shorter terms could also help you avoid paying any penalties should you need to access your money early. With the current economic climate, flexibility may be more valuable than earning the highest rates.

CD ladders

Leslie H. Tayne, Esq, founder of the Tayne Law Group, suggests CD ladders as a savings strategy.

“CD laddering may also be a good idea to look into and involves opening multiple CD accounts with different terms at once, so when one expires, you can reinvest for a hopefully higher rate,” she says.

Essentially, the strategy lets you invest in a number of CDs with staggered maturity dates so that you have more flexibility. Building a CD ladder lets you decide what to do when a CD matures — cash out, renew it or reinvest it in a longer CD term offering a higher rate. With a CD ladder, your funds are spread out, so they aren’t all locked up long term.

You can use Bankrate’s CD ladder calculator to see how to build a CD ladder to fit your savings goals.

Alternatives to CDs

CDs aren’t your only option to build up your savings. Banks offer other deposit accounts that also earn interest, but without requiring you to lock up your money for months or years. Here are two alternatives to consider.

High-yield savings account

Consider opening a high-yield online savings account instead. A high-yield savings account gives you access to competitive rates without tying up your money long term. Having quick access to your money may be a good idea right now. CDs don’t usually offer that flexibility: You could end up paying costly early withdrawal penalties if you need to pull your funds out before the CD matures.

Money market accounts

Money market accounts are hybrid bank accounts that offer features of both savings and checking accounts. You can also earn competitive interest with a money market account. A money market account may even provide access to a debit card and a checkbook.

Online banks usually offer rates that far exceed the national average and what you find at most brick-and-mortar banks. That’s because they don’t have all of the overhead costs of a traditional bank, namely paying for branches. Online banks pass along that savings in the form of higher rates. If you’re having second thoughts about tying up money long term, consider opening a high-yield savings account instead.

Bottom line

Yes, rates are lower for the foreseeable future, but you can still find much higher rates than the national average. Your best bet is to shop around for the best CD rates before making a decision. If you are still thinking about opening a CD right now, opt for shorter CD terms so you can lock in higher rates when they do rise again.

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