As the Federal Reserve cuts rates, it’s a good idea to make sure your savings are still getting the biggest boost possible.
The central bank slashed its benchmark short-term interest rate this week by a quarter point for the third time this year. As a result, some banks are pulling back their offerings on savings accounts and certificates of deposit.
Online bank Synchrony has dialed back its savings account return to 1.9%, from 2.25% this summer. And the bank slashed the rate on its five-year CD to 2.30% from 3.10%.
“I would expect rates to continue to drop on savings accounts,” said Allan Roth, founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado.
Even so, returns remain high by recent standards — you’ll just want to shop around for the best offer.
“You can still earn more than the rate of inflation and that was not the case for more than a decade,” said Greg McBride, chief financial analyst at personal finance website Bankrate.com.
Your savings can pick up a 2.30% return at Brio Direct, an online bank. Vio Bank is offering 2.27% .
Live Oak Bank is offering 2.35% on a five-year CD, if you can tie up $2,500. A one-year CD at BMO Harris Bank is paying 2.20%, but the minimum deposit is $5,000.
And robo-advisors Betterment and Wealthfront tend to offer some of the best rates on their cash management accounts, said Arielle O’Shea, banking expert at NerdWallet.
You can find the best, up-to-date rates at Depositaccounts.com.
O’Shea offered an example to illustrate the benefit of chasing the best savings rate: Say you store $10,000 in a traditional bank account paying the national average of 0.09%. In five years, you’d have earned $46 in interest. If you had kept your money somewhere earning 2% a year, however, you’d have added $1,051 to your balance.
If you are stuck between putting money aside in a savings account or CD, the question to ask is “when do you need the money?” said McBride.
Your emergency savings — ideally enough to cover six months’ worth of expenses — should be in a liquid account, he said. Once you reach that goal, you can tie up more money in a CD.
Roth offered an alternative: finding a CD with the lowest penalty. That way, you can match the benefit of a high-interest savings account without the restrictions of a CD. “If you need the money, you break the CD,” Roth said.
For example: Let’s say you parked your savings in a five-year CD with a rate of 2.5% and an early withdrawal penalty of five months’ interest and then dipped into it after just three years. You’d still have picked up an annual rate of 2.16%.
For goals further into the future, don’t rely on CDs or savings accounts, said Lisa Gerstner, contributing editor at Kiplinger’s Personal Finance. “Put longer-term savings, such as for retirement, in the stock market,” she said.