Worried About Your Savings Account APY Dropping This Year? Try This

Many people believe the Federal Reserve will begin cutting interest rates in 2024, with that trend continuing into 2025. That's great news for those who hope to borrow money because it should make loans of all types more affordable. But it's a tough pill for savers to swallow. When loan interest rates drop, savings account interest rates usually fall, too.

We've enjoyed high interest rates -- over 4.5% for the best high-yield savings accounts -- for many months now. But if you're worried these rates might disappear over the next year, you may want to consider a new home for your money. We'll look at one option below.

Lock in your rate now, and keep it for years

Certificates of deposit (CDs) are another type of savings vehicle many banks and credit unions offer their customers. Unlike savings accounts, which have fluctuating interest rates, CDs lock in your interest rate for the entire term. This could be anywhere from a couple of weeks to five years or more, depending on the CD you choose.

CDs are especially popular in falling rate environments, like the one experts are projecting to begin in 2024. Opening a CD now enables you to secure a high rate that you could hold onto for years. You could earn a lot more this way than you could by leaving your money in a high-yield savings account over the same time frame.

But CDs have their own drawbacks. The biggest is that once you put your money there, you're generally not supposed to touch it until the CD term ends. If you withdraw your money early, you'll likely pay a penalty equivalent to several months of lost interest. And you can't take just a little money out either -- it's all or nothing. For this reason, a CD isn't a good choice for your emergency fund or cash you plan to use before the CD term is up.

If you want to take advantage of higher yields without limiting your access to your cash too much, you could try a CD ladder. This is where you divide your cash between several CDs of different lengths. For example, you might put $1,000 each in a one-, two-, three-, four-, and five-year CD. When the one-year CD term is up, you could either spend the money or roll it into a new five-year CD. You do the same next year with the two-year CD, and so on.

How to find the best CD for you

Finding the best CD interest rate is many people's primary concern for obvious reasons. Generally, long-term CDs offer better rates than short-term CDs do, but a lot depends on the institution. Some banks offer competitive rates for specific terms and poor rates for others. Think about the CD term(s) you're interested in and look for the banks that offer the highest rate for that term.

You'll also need to pay attention to the minimum deposit requirements. Some are fairly low -- $500 or less -- while others might require that you set aside $1,000 or more. If you don't have that kind of cash, you can rule that CD out.

Finally, you'll want to pay attention to any special rules the CD has. No-penalty CDs, for example, allow you to take your money out without a penalty at any point. However, these are rare. There are also step-up and bump-up CDs that either automatically increase your rate at specific intervals or increase them upon your request. However, rates on these CDs only increase if the bank's current offers are higher than the rate available when you first opened the account. That may not be the case over the next few years.

Compare offers from a few banks before deciding which you'd like to work with. If you have any questions about the CDs, contact the bank for clarification. You're locking yourself into this account, possibly for years, so you don't want any misunderstandings.