Steal a glance at your savings or money market account, and you'll probably notice the Federal Reserve's decision to cut interest rates already affecting your finances. Rate cuts may be great for borrowers, but they're not great for savers.
Emergency funds can get walloped by these kinds of rate fluctuations. If you keep yours liquid in a savings or money market account, your interest rate probably fell last week. It may take another hit this week, if (as the ubiquitous analysts predict) Fed chief Ben Bernanke and his peers cut interest rates again.
CDs can help you preserve a better interest rate in this kind of environment, even though CD yields have dropped along with interest rates. Bankrate reports that average CD rates nationwide rest below 4%. As I write this, for example, the average one-year CD offered the highest yield at 3.74%. That's higher than the average five-year CD. Experts overwhelmingly agree that short-term CD rates will keep falling.
But with some comparison shopping, you can do better than average. Check out your local bank, which may have competitive rates, but don't fork over any money until you've looked around. A little searching turned up possibilities at EverBank, offering a 4.7% yield on a nine-month CD, and Capital One (NYSE: COF ) , paying interest rates above 4% on CDs with maturities of four years or longer. But you have to act quickly. Last week, E*Trade's (Nasdaq: ETFC ) bank offered a six-month CD that yielded 4.45%, but that rate's down to 3.55% this week.
If you shop around, you'll quickly notice that CDs right now don't necessarily reward you for keeping your money locked up longer. Washington Mutual (NYSE: WM ) , for instance, pays 4% on six-month CDs, but just 3.75% for a 5-year maturity. Yet other banks, like US Bancorp (NYSE: USB ) , have more typical rates that rise as you extend the term. That gives you an interesting mix of maturities and yields to compare. With some strategic shopping, you might assemble a portfolio that locks in higher-than-average CD rates at a variety of term lengths.
In other words, you can cobble together your own CD ladder. This might be the strategy for you if you're watching interest rates warily, wondering how any of those analysts can predict the economy's meandering path.
When you put all your money in a single CD, you take a gamble on the interest rates at the time your CD matures. They might have gone up, or they might have gone down. Whatever the outcome, you're stuck renewing your CD at the market rate.
You can hedge your bets a little bit by spreading your money over a "ladder" of CDs that will mature at increasing intervals. At any one time, only some of your savings will be subject to the changing winds of interest rate fluctuations. The rest will be neatly tied up in CDs paying fixed amounts.
Given the variety of CD options available right now, you might have to visit more than one bank to construct a ladder that makes the most of your money. That's a little complicated, but worth a few extra dollars in your emergency reserves.
For more ideas about keeping your savings safe: