Interest rates have been heading lower. The Federal Reserve made two emergency rate cuts in March 2020 in response to the coronavirus pandemic, moving the federal funds rate to a target range of 0-0.25 percent.
Yields on savings accounts and CDs, which tend to follow the Fed’s actions, have been on a steady decline following the central bank’s rate cuts.
For anyone hoping to make saving money a top priority, here’s what to consider as interest rates continue decreasing.
1. Shop around
Earning additional interest could be important if you’re trying to meet a specific savings goal. To earn as much interest as possible as rates fall, it’s best to comparison-shop to ensure you’re getting a good deal.
The best savings account rates currently pay around 0.6 percent APY, or about nine times the national average of 0.07 percent. That’s a significant difference, particularly if you have a lot of money to save.
CD rates started falling during the first quarter of 2020 and continued to decline into this year. Rates have somewhat stabilized as of late, though there are still occasional decreases. Online banks still offer better yields than what’s typically available in local branches. Search for a high-yield CD or savings account offered by an online bank, as their rates are likely to remain competitive compared with other institutions. Online banks that are FDIC-insured are just as safe as insured traditional banks.
In addition to comparing interest rates, savers hoping for some peace of mind can pick a bank with a rate that’s set for a certain number of months. Banks like Ally Bank, CIT Bank, Citizens Access, Investors eAccess, Marcus by Goldman Sachs and PurePoint Financial, for example, offer no-penalty CDs with yields guaranteed for about one year or less.
2. Consider CD laddering
When you ladder CDs, you’re buying multiple CDs that mature at different intervals (like buying one-, two- and three-year CDs at the same time).
As each CD comes due, you’ll have money to use and reinvest. You’ll also be locking yourself into yields that may be higher than the ones offered as banks reduce their CD rates in a falling interest rate environment.
3. Focus on your savings needs and goals
Even as rates fall, sticking to your original savings and investment strategy is key. Your financial decisions should depend on your personal goals. They shouldn’t change drastically to keep pace with what’s happening in the economy.
Greg McBride, CFA, Bankrate chief financial analyst, says the typical saver shouldn’t be making adjustments in a lower interest rate environment. Instead, concentrate on what should already be your main focus, like building an emergency fund.
“Whether rates are rising or falling, it doesn’t change your need for emergency savings, or the time horizon for when you need access to cash, or your need to generate income,” McBride says. “So for most savers, there are no steps to take.”