Rates on high-yield savings account rates and certificates of deposit remain high -- between 4% and 5%. However, many experts believe savings rates are as high as they will go based on the Federal Reserve’s latest rate hike pause. But while most experts recommend locking in a CD now, one certified financial planner, Anna N’Jie-Konte, has another suggestion.
N’Jie-Konte isn’t ruling out future CD rate increases. And even if rates have peaked, she thinks a high-yield savings account is a better bet right now.
“One thing I’m discouraging folks to do is putting money in CDs,” said N’Jie-Konte. “I just don’t think that the juice is worth the squeeze right now, given where interest rates are and where they’re likely going to be.”
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A HYSA is the best bet for most savers
Instead of a CD, N’Jie-Konte points to more versatile savings options with similarly high rates. With average high-yield savings account rates continuing to increase each week, N’Jie-Konte recommends this route for most people. Not only are rates high, but your funds are also more easily accessible than with a CD.
“While you can get 4.00%-plus with a high-yield savings account, I don’t think it makes sense to go through the hassle of locking rates [with a CD],” N’Jie-Konte said.
There’s also a chance that rates will creep up more if the Fed continues to raise rates over the next year or two, she added. And despite the Fed’s decision to hold rates steady in September, November’s Federal Open Market Committee Meeting will offer a better indication of where rates are headed.
“When we get to a point where we have multiple Fed meetings where they’re pausing rate hikes or they’re signaling that they’re going to cut rates, then I think you can start to think about a CD,” said N’Jie-Konte. Until then, she recommends keeping your money in a high-yield savings account -- in most cases.
If you have savings that exceed the $250,000 FDIC or NCUA insurance limit, N’Jie-Konte recommends moving those funds into a money market fund, or MMF.
A money market fund is a type of mutual fund that invests in highly liquid and short-term debt securities. It’s different from a money market account, which is a type of savings account that generally comes with checking writing privileges or debit card access.
“Basic MMFs like Schwab and Vanguard are paying well over 4.00% [to] 4.50%,” said N’Jie-Konte. “That’s a great place to park funds in the meantime if you need additional liquidity.”
Unlike a deposit account, money market funds are not FDIC-insured, and while they’re generally considered a safer type of investing account, they’re not without risk.
A money market fund works well for funds that are over the amount banks insure since MMF interest rates also adjust as the Fed raises rates, N’Jie-Konte, said. This makes them a better alternative than CDs, she said, which lock in your rate and prevent you from maximizing your interest if savings rates continue to rise.
Earn interest on your savings while you plan your next money move
While most experts believe that savings and CD rates are as high as they’ll get, they still all stress that getting into the habit of saving -- even if it’s a little bit each pay period -- is the most important step. Once you’ve made saving a priority, you can focus on smart ways to grow your money.
First, think about your goal for the money. If you’re kickstarting saving, you may want to avoid CDs since they usually permit only a one-time deposit. Instead, make regular contributions in a high-yield savings or money market account. You can start small to slowly build up an emergency fund, then once that’s established, consider your next goal, such as establishing a sinking fund.
After you’ve created goals and saved toward them, you can park money for short-term goals in a CD to earn a guaranteed return. Just make sure you pick a CD term that matches when you’ll need your money.
And if you won’t need the money in the near future, consider investment options better suited to longer-term goals. “Money that you don’t plan to touch for more than five years should not be invested,” Rita-Soledad Fernández Paulino, a financial educator for Wealth Para Todos.
Depending on your risk tolerance, you may invest additional savings in the stock market, through mutual funds (like a money market fund), exchange-traded funds or other investment options. Generally, your rate of return in the stock market will surpass the inflation rate, said Fernández Paulino. Talking to a financial advisor about your savings goals can help you figure out how to best diversify your portfolio.
While you’re narrowing down your best savings strategy, keep your money in a high-yield savings account to earn a little interest in the meantime.
