Make the Most of Falling Interest Rates

Many experts expect interest rates to continue getting cut, at least in the near future. The Bankrate.com (NASDAQ:RATE) CD Rate Trend Index recently showed 75% of those prognosticators expecting a short-term dip in CD rates, versus 25% expecting no change and 0% expecting a hike. For the long term, 62.5% expected a drop.

Falling interest rates are good for borrowers. If you want to buy a home, you'll likely be able to pay less for it, thanks to a lower-rate mortgage. But savers will earn less on bank accounts and other savings vehicles.

What to do
Savers can improve their situation by thinking strategically. For starters, look beyond your own bank, friendly though the tellers might be. At sites such as Bankrate.com, you can look up the best CD rates nationwide. That's right -- don't forget that although you may live in Connecticut, there's no reason you can't invest in CDs offered by a North Dakota bank, if you find a great rate there.

When I last checked, the national average rate for a one-year CD was around 4.84%. But the highest rate listed at Bankrate.com was an annual percentage yield of 5.65%, from Countrywide's (NYSE:CFC) banking subsidiary. E*Trade's (NASDAQ:ETFC) bank offered 5.25%, while MetLife's (NYSE:MET) bank was serving up 5.00%.

Another strategy to consider is locking in some longer-term rates, depending on your outlook. If you're fairly sure that rates will be lower over the coming years than they are today, you might want to move more of your CD money into CDs that last two or three years, instead of keeping that cash in shorter-term ones. A three-month CD has its appeals, but if rates are lower when it matures in three months, you'll end up earning less when you renew it.

You might also "ladder" your CD investments, to hedge your bets. Depending on your needs and preferences, you might, for example, put a third of your money in six-month CDs, a third in two-year CDs, and a third in five-year CDs. Then, as each matures, invest in new two- or three-year CDs at the prevailing rates. That way, you'll lock in some long-term rates while still leaving some money in short-term investments to take advantage of possible rate hikes. Bond ladders are also worth exploring.

So take a few minutes to ask yourself where you think interest rates are headed, and how sure you are. Then act accordingly, and deploy your short-term money to get the best bang for your bucks.

Look closely at online banks, too, such as ING (NYSE:ING). Although ING recently cut its rates on its savings accounts, online banks often pay more interest than their bricks-and-mortar counterparts do.

Learn even more in our Savings Center.