The Federal Reserve cut the federal interest rate on July 31, and—as predicted—banks are starting to cut their interest rates as well.
These lowered interest rates affect both savings accounts and CDs, as MarketWatch reports:
An analysis of Federal Deposit Insurance Corp. data by behavioral economics consulting firm Analyticom found that rates for certificates of deposits (CDs) are falling across the board for the first time in five years.
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In the past weeks, multiple online banks, which have long offered competitive rates on their savings account products, have begun to lower those yields.
If you want to get the maximum value out of your saved income, you have a few options:
Shift your savings into a bank with a better interest rate
Don’t like the interest rate your bank is giving you? Start shopping around for another bank. Online-only banks often provide slightly higher interest rates than brick-and-mortar banks, but it’s important to compare all of the numbers: interest rates, minimum balance requirements, monthly transfer requirements, fees, and so on.
Once you’ve found a bank you like, use our guide to switching banks to make sure you get your funds transferred without making any common mistakes, like falling below the minimum balance in your old account before the transfer is complete and getting charged an unexpected fee.
Build a CD ladder before rates drop even further
Earlier this year, we looked at whether it was worthwhile to get into CDs before interest rates peaked. As Lifehacker’s Lisa Rowan explained, missing the top of the peak isn’t that big of a deal:
Take a look at the last two times the federal funds rate dipped significantly (2000-1 and 2007-8) and you’ll see the reductions took place incrementally, rather than in one fell swoop. Yes, some slides are more noticeable than others (see December 2007 to May 2008). But unless an economic meteor hits, we’re not going to drop from 3% interest to 0.25% interest on CDs in a one-month span.
However, we’re now in that incremental rate reduction she’s referring to. So if you’ve been thinking about getting into CD ladders and taking advantage of their fixed interest rates, there’s still time. Once you put your money into a CD, you can’t take it out before the CD term ends without paying a penalty, so keep that in mind before you build your ladder.
Put more of your money into the market
Yes, the stock market is “in flux” right now, and yes, we might be headed into a bear market (that’s the bad one). However, if you’re playing the long game and are ready to buy and hold, there’s nothing wrong with getting in while the market is in a temporary dip. Buy low, sell high, right?
If you’ve got some cash above and beyond your emergency fund, it’s worth asking yourself whether you should put that money into the market. Same goes with the money in your checking account, btw; if you’ve got more in there than you need, it might be a good idea to put that money where it can earn a higher return.
Just remember that investments are not guaranteed—and if we do end up in another recession, you might not see those higher market returns for a while—so don’t invest any cash you can’t afford to lose.