Savings Account Rates Have Been Cut in Half. Where Should You Put Your Cash?
by Matt Frankel, CFP® | Updated July 17, 2021 - First published on July 1, 2020
Interest rates have fallen, but here are some ways you can still maximize your yield.
Thanks to soaring competition in the online banking industry, as well as relatively high market interest rates, it wasn't uncommon to see savings account interest rates of 2% or even more in 2019.
Unfortunately, those high rates are a thing of the past -- for now. The COVID-19 pandemic has affected many aspects of our lives, including saving. It led the Federal Reserve to slash the benchmark federal funds rate to near-zero, and interest rates on deposit accounts fell along with it. Now, the average interest rate offered by The Ascent's top savings accounts is roughly half of what it was a year ago.
With that in mind, here are a few quick suggestions you can use to maximize the yield from your cash in this lower-interest environment.
Shop around for yield
It's always important to shop around for yield, but even more so when rates are low. As of June 23, the average savings account interest rate in the United States is a paltry 0.06% according to FDIC data.
Meanwhile, there are several reputable online lenders that offer savings accounts with annual percentage yields (APYs) of 1% or higher. Be sure to check The Ascent's best savings account page for the latest offers because rates fluctuate regularly. But whatever you do, don't just settle for whatever savings interest rate your local bank is offering -- especially now.
CDs may be a better choice for money you don't need immediately
You can typically (but not always) get more yield for your money if you're willing to leave it untouched for a certain length of time. In banking terms, this means opening a certificate of deposit, or CD account. By opening a CD, you're agreeing to leave your money in the account for a specified term (one-year and five-year CDs are common examples).
Like savings accounts, CD interest rates also fluctuate regularly. Just to illustrate how a CD can work to your advantage, let's imagine one of our favorite online banks is offering an APY of 1.05% on savings accounts. This same bank is offering a 1.35% APY on one-year CDs and a 1.40% APY on five-year CDs. So, if you are fairly certain you won't need to use your cash for a while, opening a CD can be a great way to maximize your yield.
A CD ladder could be the ideal solution
A five-year CD is generally going to get you the highest initial yield on your cash. The problem is that it's a long time to keep your money tied up. And what if market interest rates rise between now and then? For example, what happens if you get a five-year CD at 1.40% APY and a year later the going rate for a five-year CD rises to 3%, which is about what it was last year? If you put all of your money into a five-year CD, you're stuck with the low rate for the duration of the term unless you want to pay an early withdrawal penalty.
One solution could be to create a strategy known as a CD ladder. First, put whatever cash you might need within the next year into a savings account so you'll have access to it. Then, divide the savings you won't need for at least a year into five parts. Put one-fifth into a high-yielding one-year CD, one-fifth into a two-year CD, and so on. In other words, if you have $10,000 to spare, you would put $2,000 into five separate CDs with maturities ranging from one to five years.
Here's the idea: Each year, one-fifth of your money will mature, so you can then reinvest it in a five-year CD at the then-current interest rate. Over time, you'll have all of your cash in CDs at longer-term interest rates, but without having all of your money tied up for five years at a time.
Maximize your savings yield now and later
There are still some excellent options to be had when it comes to getting a strong yield on your savings. Although earning between 1% and 1.35% might seem low, consider that the national average savings account interest rate is just 0.06%. When making your savings decisions, make sure you take advantage of higher-paying online banking options, and consider when you might need to access your money. That way, you can position yourself to get the most yield on your money, both now and in the future.
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