Here’s how you can protect your savings from future rate decreases with a CD

3 min read

The Federal Reserve has the power to change rates. Some Americans don’t realize they have the authority to do this too — at least for themselves.

Many savings deposit accounts and CD rates at online banks are likely to decline on the heels of the Federal Reserve’s unscheduled 50 basis-point cut of rates on Mar. 3.

No matter where rates are at, people are still leaving money on the table if they aren’t earning any interest. Nearly one-in-four Americans weren’t earning any interest on their short-term savings, according to a Bankrate survey in May.

Great opportunity for savers with CDs

Some Americans are likely still missing out on an opportunity to easily earn more interest or at least some interest. This is because the national average savings account yields 0.1 percent APY.

“The story is, why do so many people have their money sitting in savings accounts earning 0.1 percent?” says Greg McBride, CFA, Bankrate chief financial analyst.

Some banks were already cutting CD rates on the heels of the Fed’s most recent rate cut and rates are likely to only go down in the near future.

“Look, none of us have the crystal ball into what’s going to happen in the future,” says Adam Stockton, director of consumer pricing at Novantas. “It seems unlikely at this point that rates are going to go up in the near term.”

For those on the fence about purchasing a CD, it might be a good time to consider making the move — with two important caveats.

“It’s only a good time to do that if they’re confident that they can lock their money away for that period of time,” Stockton says. “Because the advantages of getting a CD are negated if they end up having to pay an early withdrawal penalty — certainly on a classic CD.”

He also urges anyone considering purchasing a CD to be mindful of their overall financial goals.

“It’s a good time to think about it, if somebody’s on the fence,” Stockton says. “But I would be careful about recommending that people change their investment strategy wholesale.”

Adjusting to a changing rate climate

From 2015 to 2018, rates only went in one direction — up. However, the Fed’s actions to lower rates since July 2019 have forced savers to start thinking differently.

There are few guarantees in investing. But CDs offer a fixed APY and the Federal Deposit Insurance Corp. (FDIC) backs your CD if it’s at an FDIC-insured bank and within insurance limits and guidelines. A CD is worth considering if you’re looking to get a higher, fixed yield on your savings.

“A lot of decisions are ultimately governed by your need for the money, your time horizon and your investment goals,” McBride says.

So take the time to determine if this makes sense for your money before locking in a CD. It’s a good idea to research CD penalties to be aware of the worst-case scenario, if you were to break the CD early. A four or five-year CD may have a penalty of as much as 540 days of interest in some cases.

A no-penalty CD can be a happy medium if you’re not sure when you’ll need these funds. A no-penalty CD offers you a fixed APY without the risk of a penalty. But the APY is usually lower than a traditional CD. Often, a no-penalty CD will not allow for withdrawals to be made during the first few days (while the ones that do may charge a penalty).

CD ladders and declining rates

A CD ladder is a strategy where you might buy multiple CDs and stagger their maturity dates. This way you’re both diversifying your future rates and liquidity.

By saving in a variety of maturities one gains some liquidity or flexibility when new opportunities for that money, possibly higher rates, come until view,” says Mark Hamrick, Bankrate’s senior economic analyst. 

For example, let’s say that a five-year CD doesn’t appear to be the right option for you because you’ll likely need some of those funds before the five years are up and want to avoid a penalty for early withdrawal. But if you had a ladder with a one-year CD, a three-year CD and a five-year CD instead, one of your CDs would be much closer to maturity if a need arose where you had to take some money out.

You’ll be glad you have some longer-term CDs in your ladder, if rates continue to decrease. Meanwhile, shorter-term CDs can be put into higher-yield CDs upon maturity if rates increase. You can use Bankrate’s CD Ladder Calculator to help build a ladder.

Fixed-rate CDs vs. variable-interest savings accounts

A high-yield savings or money market account APY can seem great. But in most cases, the APY is variable and not guaranteed. A high yield on a savings deposit account could end at any time, since these APYs are usually variable.

Banks know rate decreases can cause some to switch banks. They can also earn a bad reputation by having high yields for a short time and then lowering them. But decreases on savings deposit accounts have happened nearly across the board.

That’s why CDs are good when rates are falling, since they earn a fixed APY during their term.

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