- Interest rates on savings accounts and certificates of deposit (CDs) closely follow the Federal funds rate.
- Now might be a good time to open a CD and lock in a fixed interest rate to grow your savings, if you can part ways with your money for at least a year to earn over 2% APY.
- The Federal Reserve is expected to either keep interest rates steady or make further cuts in the first half of 2020.
- A high-yield savings account will still help you grow your money if you need more immediate access to it, but your APY will drop if the Fed cuts rates.
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The Federal Reserve has cut interest rates three times since late July, in turn lowering the earning potential on savings products.
While it’s never a bad time to save money, relatively low interest rates should prompt you to be more strategic about where you save money. The two best options for keeping your money safe from market risk, yet still growing are high-yield savings accounts and certificates of deposit (CDs).
If you can afford to part ways with a portion of your savings for at least a year, a CD could be a good way to earn more on your money in the long term without taking on any risk.
While you can’t access money in a CD for anywhere from three months to five years without paying a penalty, you do lock in a fixed interest rate. With a high-yield savings account, you can access your cash whenever you want, but the interest rate can change at any time in accordance with the Federal funds rate.
Some of the best CDs available right now are offering annual percentage yields (APY) between 2.10% for a 1-year term and 2.25% for a 5-year term. Meanwhile, the best high-yield savings accounts are mostly earning between 1.70% and 1.90%, but can be as high as 2.20% APY.
The CME FedWatch Tool predicts the Federal Reserve is more than twice as likely to decrease the Fed funds rate than increase it in the first half of 2020, which makes it a good time to open a high-earning CD. If interest rates were expected to rise, it probably wouldn’t be the right time to open a long-term CD because you may miss out on a higher rate while your money is tied up.
No-penalty CDs do exist, which don’t levy a fee for dipping into your CD early, but the rates aren’t as competitive. The same goes for shorter-term CDs, like three or six months.
In most CDs, you can’t add or remove money from the account after the initial funding period until the maturity date or you’ll forfeit some of the interest you earned as a penalty. Most don’t allow partial withdrawals either. For those reasons, a CD is usually not the best place for an emergency fund or other money you’ll need in short order.
If you anticipate needing to dip into your CD for cash, stick to a high-yield savings account. The higher interest rate isn’t worth it if you’re going to be forced to give up the earnings anyway.