Rates for high-yield savings and certificates of deposit accounts remain high following the Federal Reserve’s decision to hold rates steady. Some banks are offering annual percentage yields over 5% for short-term CDs -- but experts warn rates could begin slipping in early 2024.
Both savings accounts and CDs offer low-risk ways to earn interest. Bernadette Joy, a CNET Money expert, says it’s a great time to grow your savings with these options. But regardless of where rates go in 2024, Joy suggests growing your money with high-yielding accounts now. Here’s why.
Banks are already lowering savings rates
The Fed has indicated there could be three rate cuts next year. Although many experts don’t expect the first rate cut to happen until midyear, some of the banks we track at CNET are already lowering rates slightly for select CD terms. But high-yield savings rates are staying the same at most banks.
We’ve been seeing banks holding savings rates relatively steady, with some banks lowering CD rates slightly over the past month. This week, Marcus by Goldman Sachs increased its nine-month CD to 5.30%, but several banks -- MYSB Direct, American Express, Barclays, Connexus and Limelight -- dropped their CD rates slightly for select terms.
If the Fed is done hiking rates, there’s a chance that CD rates have peaked at most banks. Typically, banks move in lockstep with the Fed’s decisions. When rates start to drop, CD and savings rates are likely to follow.
While rates remain elevated, you can take advantage of the high rates by stashing savings in these interest-earning accounts going into the new year.
Trying to time the savings rate market can cost you
Although the Fed has indicated it plans to lower the federal funds rate next year, there’s still a chance rates could rise. The Fed has built flexibility into its plan and if inflation or other economic indicators do not track as expected, it’s possible the central bank may go in the other direction and raise rates. And banks may also raise savings rates to attract new customers and stay competitive. So it’s hard to know the right time to lock in the highest rate.
But Joy recommends not worrying about where rates are heading and instead focusing on maximizing your earnings based on what’s available now. “I wouldn’t worry about future rates if what’s available in the present can help you save more,” said Joy.
If you already have a plan for your financial goals, the evolving rate environment shouldn’t scare you into thinking you need to shift gears.
“Similar to how we say ‘don’t time the stock market’, we shouldn’t be shifting our overall money strategies too much if they’re sound,” said Joy.
Joy herself opened two CDs earlier this year when rates were only around 4% APY, and later opened an 11-month CD with a 6.15% APY. But she doesn’t regret locking in the lower rates, since it allowed her to earn guaranteed interest.
There’s no harm in researching higher rates and moving the money if you aren’t going to lose any money you’ve been saving. But if your money is already in a CD or Treasury bill you opened last year, do the math to make sure you’re not losing money before switching accounts.
A high-yield savings account or CD can help you earn more, now
Most traditional savings (and even interest-earning checking) accounts offer fairly low rates, between 0.10% and 0.25% for most banks. And if you need to pay a monthly fee for any of these accounts, you might actually be losing money.
Of course, interest isn’t everything. You may keep money in these accounts for nearby convenience or ATM access. But if you want to start earning a better return, setting up a high-yielding account at an online bank or credit union is easy and often requires only a few minutes to get started.
If you’re just getting started on your savings or need flexible access to your money, consider a high-yield savings account. Joy recommends saving at least one month of expenses in a high-yield savings account to serve as an emergency fund. Savings accounts offer variable interest rates, which means they can change based on economic factors and the bank’s discretion. But, you can access your money at any time, penalty-free, which can come in handy if a surprise car repair pops up or you need the money on a whim.
If you have money earmarked for specific goals in the future, however, then a CD can help you earn a guaranteed return. When you open a CD, you lock in a fixed rate, making your return predictable. And since CD rates are at record highs, right now is a good time to take advantage of this savings vehicle, if you can.
To choose the right CD term, consider CDs that align with your financial goals. For example, if you plan to buy a car in less than a year with the money you’ve saved, Joy suggests a nine-month or one-year CD, These shorter-term CDs currently offer higher rates than those with longer terms., Short-term CDs also give you the flexibility to access your money sooner.
“I have my money in three different CDs to take advantage of high-interest rates, and plan to reinvest them into new CDs in 2024 when their terms are up,” said Joy.
But if your goal is further out, a long-term CD like a three- or five-year option, may work better. Longer-term CDs are a better fit for money you don’t need to touch for several years, like a down payment for a home in the future or additional savings for retirement.
If you think you’ll need to access your funds before the CD term is up, a no-penalty CD or high-yield savings account may be a better fit. With traditional and high-yield CDs, if you withdraw your money before the term ends, you’ll pay an early withdrawal penalty that can eat away at the interest you earned.
No matter which savings option you choose, starting sooner will help you earn a higher return, while building good savings habits.
Recommended Articles
