Two of the best ways to help you save money for short-term priorities such as cars, vacations, or just saving for a rainy day are high yield savings accounts and certificates of deposit (CDs). Here are five strategies to ensure your savings account and CD funds are working just as hard to grow your money as you did to save the money in the first place.
Tip 1: Check Out Online Banks for Best Savings Account and CD Rates
Search online and it’s pretty easy to compare available interest rates for high yield savings accounts and CDs. A recent check would show you that the average interest-bearing checking account delivers only 0.04 percent annual percentage yield (or APY); typical high yield savings accounts are offering around 2 percent APY; and the best CD rates are now going up to 3.0 percent APY (for a CD that matures in two years, often with a minimum deposit of up to $10,000). (“Not Saving Enough for a Rainy Day? High Yield Savings Accounts and CDs Can Help”)
Online banks often offer some of the best interest rates, since they don’t have the same overhead costs as brick-and-mortar banks. Moreover, in addition to having leaner operations, the online banks are also aggressively competing for business with traditional banks. Another advantage of online banks is that they are open 24/7 whenever you need access, and not only when the doors of the bank are open. ("The Basics of High Yield Savings Accounts")
Tip 2: Consider Interest Rate Trends
Another factor to keep in mind as you decide whether to use high yield savings accounts and CDs is whether interest rates are trending up or down. There are no guarantees, of course. With the economy in good shape, the Fed has raised the federal funds rate three times this year as a hedge against inflation, the latest lift to a range of 2 to 2.25 percent. Fed officials have said to expect at least three rate hikes in 2019, and more in 2020.
For investors, these fed rate hikes are good news because they usually mean banks will raise interest rates accordingly for their savings account and CD customers in order to stay competitive. Indeed, in the past two years as the Fed interest rate has risen, the national average rates for CDs of all maturities have been rising, and the rate for a 12-month CD has roughly doubled.
Tip 3: Using Ladders to Optimize CD Interest
While high yield savings accounts have variable interest rates that can rise at any time, CD buyers are typically locked into a fixed rate at the time of purchase. So, with more increases to the Fed’s discount rate expected over the next year and the potential of higher CD interest rates on the horizon, CD buyers may wish to understand the potential power of using a “CD Ladder.” With the CD ladder approach, instead of buying one large CD, a person would break the purchase into smaller CDs that mature over different time periods. That affords you the opportunity to buy higher interest rate CDs with the proceeds if interest rates rise.
So for example, instead of investing $10,000 in a single CD, you could build a CD ladder by buying a $2,500 CD that matures in one year, another $2,500 CD that matures in two years, a $2,500 CD that matures in three years, and a $2,500 CD that matures in four years. Then, after the first CD matures, you could buy another CD and take advantage of any interest rate rises that occur.
TIP 4: Watch Out for Fees and Minimum Balances
One thing to watch for from both online and traditional banks are unexpected fees and restrictions. Some banks and financial institutions offer higher rates but require minimum balances. Others nickel-and-dime you with a variety of charges: fees to set up accounts, wire charges to get money in and out the account, or fees for paper statements.
TIP 5: Ask About Security And Reliability
It seems every week there is some egregious security breach or hack of a major financial institution. That’s why before deciding which institution to trust your money with, examine each potential partner’s credibility, and look for a robust security process that safeguards your private information and funds. ("The Basics of High Yield Savings Accounts")
Among the questions to ask your provider: Does it use multi-factor authentication to prevent unauthorized access? Does it use Secure Socket Layer (SSL) encryption to create a secure connection with your browser when you login in or fill out an application online? Does it automatically log you out of your account after a period of inactivity to prevent others from seeing or accessing your online accounts?
High Yield Savings Accounts vs. CDs
High yield savings accounts offer variable interest rates that are typically higher than regular checking and savings accounts from brick-and-mortar banks. In return for higher rates, there are some limitations in withdrawals (typically a maximum of six online and telephone withdrawals per monthly statement cycle). Savings accounts are flexible and are ideal for emergency funds because they are so accessible.
Where savings accounts have variable interest rates CDs offer fixed interest rates that are generally higher than rates from savings accounts. But in return for the higher rate, funds can be accessed without penalty only when the CD reaches maturity. CDs generally mature in terms ranging from 6 to 60 months, with many stops in between.