In March, as a response to the pandemic brought by the coronavirus, two emergency rate cuts were made by the Federal Reserve. The federal funds rate was moved to the target range of 0-2.5%. Interest rates are clearly heading lower, and if the crisis continues, it will only get worse.
The lowering of interest rates will surely hurt those who have tucked their hard-earned money into savings. That holds true even if lower interest rates are actually meant to aid or help the economy.
If you’re one of those who are hoping to make saving cash a top priority, then, read on to learn more about savings accounts and what to consider when opening one in a low-interest economy.
Why Open A Savings Account?
A savings account refers to a deposit account held at a financial institution that bears interest over time. Savings accounts pay a decent interest rate, providing a safe and reliable source of funds you can use to meet your short-term needs. Check out the following reasons you should open a savings account instead of keeping cash at home:
Helps In Achieving Personal Finance Goals
If you feel that you need to access funds, you only have to go to the nearest branch of your bank and transfer money from your savings account to your checking account, or make a withdrawal. Indeed, with savings accounts, banks, credit unions, and other financial institutions make it easy for consumers to reach their funds. It’s also a good thing that you can perform unlimited cash withdrawals over the counter or through a cash dispenser. Fund transfers, however, often have restrictions.
Inquire at your bank about a compound interest savings account to help grow your savings over time. You can also use a daily compounding calculator to help you compute the expected growth of your savings. Regardless of whether you have a small or large balance, compounding enables you to earn interest on your principal or saved amount, including the interest already accrued.
More importantly, a savings account will help you set some money aside to help you achieve your financial goals. As you probably already know, having cash in hand will make it easy for you to spend on something or things that are actually not budgeted for.
High-interest savings accounts are the safest place where you can save money. Cash at home or on hand can get lost very easily. That being said, rather than hiding a lot of cash at home or carrying it around, it’s best to have it kept in a savings account. The good thing about keeping your money in a savings account, especially at the bank, is that it gets insured by the federal government so that you can still recover it if ever something terrible happens.
It’s best to do comparison shopping for you to ensure that you’re getting an excellent deal. It’s a way of making sure that you’ll be earning as much interest as possible even if rates fall. You know how important having the chance to earn additional interest could be, especially when it comes to meeting a specific savings goal.
Earning the national APY or average annual percentage yield of 0.1 percent and earning an APY of 1.7 percent could, no doubt, have a big difference. The difference even becomes bigger if you actually have a lot of funds to save. Keep in mind that the best rates for savings accounts typically pay around 17 times what the national average offers. The goal is to find a place where you can open a savings account and receive an interest rate that’s closer to what’s considered as the best.
Going with savings accounts that online banks offer, most of the time, is your best option. Online banks still offer competitive, better yields when compared to local branches. Even when interest rates slide further, the rates you’ll get from online banks are also likely to remain competitive.
In connection with comparing interest rates, if it’s peace of mind that you’re really after, opt for a bank, may it be online or local brick-and-mortar, that offers a fixed rate set for several months.
When Do You Need The Funds?
You have to ask yourself this question and honestly answer it. If you’re going to spend or need to withdraw the funds within a few years, then, it would be best actually to leave it in a deposit savings account. One thing you have to remember is that there are accounts that only deliver substantial or significant returns over a longer period. That being said, if you don’t expect yourself needing the funds for a while or if you have enough money on hand to see you through an unexpected job loss or emergency, consider other options. One option you can take a look at is a high-yield, no-penalty CD or certificate of deposit. A CD is ideal for consumers who want to grow their savings even outside the traditional savings account. More about the no-penalty certificate of deposit below.
Open A No-Penalty Certificate Of Deposit
Why should you opt for no-penalty CDs over traditional CDs? First, they won’t go down even if interest rates will continue to drop because of their fixed high-yield rate. Second, when compared to a traditional CD, no-penalty CDs offer customers more access to their funds. What that means is that you can still withdraw your full balance without penalties or fees even after locking in one fixed-rate, high-yield, no-penalty certificate of deposit. You can do it beginning seven days after you fund your account.
CDs provide a great source of funds for your retirement investment. Whether you want to start a small bakeshop or flower shop in your early retirement years, CDs provide the amount of money you’ll need without much hassle. While you probably have a retirement plan set in place, having another more flexible and higher-yielding source of funds is a smart idea.
CDs are one of the many retirement investments you can try. Reinvest in other retirement vehicles when your CD expires to attain a higher rate of return. You can reduce living expenses or work longer to attain goals offered by the CDs.
Consider CD Laddering
When laddering CDs, you’re going to buy multiple certificates of deposit that mature at varying intervals. You’ll have the money you can use and reinvest as each CD comes due. It also gives you the chance to lock yourself into a CD with a yield that’s higher when compared to what the banks currently offer in an environment with falling interest rates. Laddering CDs is, indeed, a strategy that savers can consider, especially those who are hoping to insulate themselves in the face of falling interest rates.
Open A Money Market Account
You can also consider money market accounts if CDs don’t seem like a smart strategy for your financial goals. A money market account is an excellent alternative for a traditional savings account. Savers can enjoy having spending options while their money earns higher interest.
A money market account typically comes with a debit card or checks you can use to access your account money directly. Money market accounts are like a savings account, only that they tend to actually be more restrictive when it comes to minimum balance and withdrawal limits. They’re FDIC-insured, and their rates are typically higher than traditional savings accounts, too.
Aside from the options of how to open the best savings accounts discussed above, another valuable way to save your hard-earned money is through retirement plans or accounts. 401(k) plans and individual retirement accounts (IRA), for instance, aren’t only low risk, but are also crucial to a comfortable life after retirement. The earlier you start to save in these accounts, the more your funds grow.