Buzz
Following the Federal Reserve's decision to lower interest rates on July 31, banks have started to reduce their own rates, as expected.
These lowered interest rates are impacting both savings accounts and CDs, according to a report from MarketWatch:
An analysis conducted by the behavioral economics consulting firm Analyticom, using data from the Federal Deposit Insurance Corp., revealed that rates for certificates of deposit (CDs) are dropping across the board for the first time in five years.
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Over the past few weeks, several online banks, known for their competitive rates on savings accounts, have started to reduce those yields.
To maximize the value of your savings, consider the following options:
Transfer your savings to a bank offering better interest rates
If you're not satisfied with the interest rate your bank offers, explore other options. Online banks often provide slightly higher rates than traditional banks, but make sure to compare all factors: interest rates, minimum balance requirements, monthly transfer rules, fees, and more.
Once you've chosen a bank, use our guide to switching banks to ensure your funds are transferred smoothly without common mistakes, such as dropping below the minimum balance in your old account before the transfer is completed, leading to unexpected fees.
Create a CD ladder before rates fall any further
Earlier this year, we examined whether it was worth it to invest in CDs before interest rates peaked. As Mytour’s Lisa Rowan pointed out, missing the peak isn’t a huge concern:
If you look at the last two times the federal funds rate dropped significantly (2000-1 and 2007-8), you'll notice the cuts were gradual, not immediate. While some declines are more obvious (see December 2007 to May 2008), we’re unlikely to see a drastic fall from 3% to 0.25% on CDs in a single month unless an economic disaster strikes.
At present, we’re experiencing that gradual rate reduction she mentioned. So, if you’ve been considering building a CD ladder to lock in fixed rates, there’s still time. Keep in mind that once your money is in a CD, you can’t withdraw it before the term ends without paying a penalty, so plan carefully before constructing your ladder.
Invest more of your funds in the market
Sure, the stock market is currently 'in flux,' and we might be heading toward a bear market (the bad one). But if you're thinking long-term and are prepared to buy and hold, there's nothing wrong with entering the market during this temporary downturn. Buy low, sell high, right?
If you have extra cash beyond your emergency fund, consider whether it's time to invest it in the market. The same goes for the money sitting in your checking account; if there's more than you need, it might be a good idea to move that money into something with a higher return.
Just keep in mind that investments aren’t guaranteed, and if we do face another recession, those higher returns may take a while to materialize. So, only invest money you can afford to lose.
