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Today’s best rates for savings accounts and certificates of deposit are a far cry from last year’s rates of 2%. And rates across most banks will likely keep dropping.
"It will be increasingly uncommon to find institutions that are willing to pay 1%" on a savings account, says Mike Schenk, chief economist for the Credit Union National Association.
The reasons are many — the Federal Reserve dropped its benchmark rate in March, the pandemic-related economic crisis continues — but rates aren’t the only strength of savings accounts and CDs. Here’s how else they help you save.
Savings accounts provide cash access and tools
Taking a savings account for granted is easy to do; they’ve been around a long time, and most Americans have one. But it bears noting how savings accounts can help our financial lives:
Easy access to funds: Unlike with brokerage accounts, you don’t sell investments in order to convert your money back to cash; savings accounts keep money as cash. And you can easily transfer money to your checking account as needed.
Useful barrier to spending: A savings account, which lacks a debit card, offers fewer ways to withdraw than checking accounts. And historically, savings accounts had a limit of six withdrawals per month, although in April 2020 the Federal Reserve stopped requiring banks to enforce this limit. Having an account separate from your checking can help you intentionally save, instead of blurring the divide between your spending and saving funds.
A destination for automatic transfers: If you would benefit from a hands-off approach to saving money, you can set up recurring transfers from your checking to savings accounts. Or split direct deposits between accounts.
Option for multiple accounts for goals: Open several accounts and dedicate them to different spending categories, like an envelope budgeting system. One could be a backup for your checking account, one for vacation and one an emergency fund.
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"How you use these tools should be based on how you manage your money,” says Saundra Davis, founder and executive director of Sage Financial Solutions, a San Francisco Bay Area-based nonprofit focused on financial coaching. If you don’t mind tracking multiple accounts, go for it.
» More from NerdWallet: See our list of the best high-interest accounts
CDs can save you from yourself
CDs require you to commit to keeping a fixed sum under lock and key for a specific time period (here’s how to open one). Even when rates are low, this type of savings account has benefits:
Freeze some savings: CDs lock up your money for a term you choose, generally from three months to five years. This can make sense if you have a fixed sum intended for a future purchase such as a down payment for a home. Sometimes being unable to access funds until the time is right can bring peace of mind.
Option to hedge bets on present and future rates: To avoid locking too much money into a long-term CD, one common strategy is to diversify an investment across multiple CDs over time using a CD ladder. Open a few CDs with staggered terms such as three months up to one year, or longer; as each CD matures, reinvest funds in, say, a new one-year CD. (Learn more about how CD ladders work.)
A note of caution: Breaking into a CD early typically costs you a penalty that can be several months to a year of interest. If you aren’t sure when you’ll need the money, it may be best to skip CDs right now.
» Want to compare? See the best CD rates this month
Both CDs and savings accounts offer protection
One of the biggest benefits of both types of account is federal deposit insurance up to $250,000 per customer at an insured bank or credit union. If a financial institution goes bankrupt, the government guarantees you’ll get your money back.
And rates will rise again
After the 2007-2008 financial crisis, CD and savings account rates dropped and remained low for years. Online banks and some credit unions were the first to step up to provide higher yields than traditional banks were offering. Their rates reached heights above 2% for savings accounts and 3% for long-term CDs. If history is any indication, recovery may be a long road, but it’ll come.
"If you freak out by watching rates, don’t watch them,” says Davis. “If watching rates gives you information to make sound decisions as part of your financial plan, then watch them.”
Whether or not you check rates, keep in mind: Rates play an important role in boosting savings, but they’re not the only way that savings accounts and CDs help you. If you have money socked away in an account, you’ll be ready to benefit once rates do rise again.
FAQs
While high-yield savings accounts have some caveats to account for they're still arguably better than some popular alternatives. Traditional savings accounts come with a minimal 0.46% interest rate right now, meaning you're losing money by keeping your funds untouched in one of those accounts.
Is it worth putting money in a CD right now? ›
If you don't need access to your money right away, a CD might be a good savings tool for you in 2024 while average interest rates remain high. CD interest rates are high in 2024 — higher nationally, on average, than they've been in more than a decade, according to Forbes Advisor.
What is the biggest negative of investing your money in a CD? ›
The biggest disadvantage of investing in CDs is that, unlike a traditional savings account, CDs aren't flexible. Once you decide on the term of the CD, whether it's six months or 18 months, it can't be changed after the account is funded.
How much does a $10,000 CD make in a year? ›
Earnings on a $10,000 CD Over Different Terms
| Term Length | Average APY | Interest earned on $10,000 at maturity |
|---|
| 1 year | 1.81% | $181 |
| 2 years | 1.54% | $310.37 |
| 3 years | 1.41% | $428.99 |
| 4 years | 1.32% | $538.55 |
1 more rowApr 24, 2024
It's important to not keep too much money in your savings, and consider investing money over what you need for an emergency fund or that big near-term financial goal you're working toward. Money kept in a savings account for many years will definitely lose value to inflation.
What are 3 cons to using a savings account? ›
There are also a few potential downsides to savings accounts.
- Interest Rates Can Vary. ...
- May Have Minimum Balance Requirements. ...
- May Charge Fees. ...
- Interest Is Taxable.
The biggest risk to CD accounts is usually an interest-rate risk, as federal rate cuts could lead banks to pay out less to savers. 7 Bank failure is also a risk, though this is a rarity.
Why is CD not a good financial investment? ›
If inflation is rising, it could outpace the rate of return you're earning on your CDs, especially in a low interest rate environment. This means even though your savings is growing, it won't stretch as far when it's time to spend it. Notably, this is also a risk when keeping money in savings and money market accounts.
Why am I losing money on CD? ›
The most common way people lose money through a CD account is by withdrawing their funds before the term ends. When you take money out of your CD account before the maturity date, you'll typically have to pay an early withdrawal penalty.
Can I lose my money in a CD account? ›
The risk of having a CD is very low. Unlike how the stock market or a Roth IRA can lose money, you typically cannot lose money in a CD. There is actually no risk the account owner incurs unless you withdraw money before the account reaches maturity.
While longer-term CDs may tie up your funds for years, a 6-month CD allows you to access your money relatively quickly. If you suddenly need your $5,000 for an emergency or a more lucrative investment opportunity arises, you won't have to wait years to access your funds without incurring hefty penalties.
Are money CDs safe if the market crashes? ›
Yes, CDs are generally still safe even if a stock market crash occurs. CDs are a type of bank account. Many accounts offer a set rate of return for a specific timeframe that won't fluctuate.
Should I put a million dollars in a CD? ›
However, federally insured banks and credit unions only insure up to $250,000 per depositor per account ownership category. If you put more than this amount in a single CD, some of your money will be at risk. You can still safely invest more than $250,000 in CDs by opening accounts at multiple financial institutions.
Can you get 6% on a CD? ›
Finding reliable 6% CD rates
You can find 6% CD rates at a few financial institutions, but chances are those rates are only available on CDs with maturities of 12 months or less. Financial institutions offer high rates to compete for business, but they don't want to pay customers ultra-high rates over many years.
Why should you deposit $10,000 in CD now? ›
The top nationwide rate in each CD term—from 6 months to 5 years—currently ranges from 5.20% to 6.18% APY. With a $10,000 investment in a top-paying CD, you can earn hundreds to thousands of dollars of interest on your money—and much more than if you keep it in a typical savings account.
How much will a $500 CD make in 5 years? ›
This CD will earn $108.33 on $500 over five years, which means your deposit will grow by 21.7%.
How high will CD rates go in 2024? ›
Key takeaways. The national average rate for one-year CD rates will be at 1.15 percent APY by the end of 2024, McBride forecasts, while predicting top-yielding one-year CDs to pay a significantly higher rate of 4.25 percent APY at that time.
Is a 5 year CD a good investment? ›
A five-year CD is a low-risk investment with predictable returns and a significantly higher yield than traditional savings. When interest rates are high, a five-year CD allows you to lock in an attractive rate for a relatively long time.
