Why Interest Rates are Dropping and What You Should Do About It

Interest rates today are lower than in the recent past. This could spell good news if you’re looking to borrow money but might not be as great for your savings. A lower interest rate could mean slower growth for your personal savings, which can negatively affect your financial planning timeline. 

When navigating changes in interest rates, many people look for new and different ways to save. You’ve worked hard for your money, so don’t let dropping interest rates stop you from making the most of it. Not sure how to save money with interest rates today? You’ve got options.

Before we get started, let’s clear up what exactly federal interest rates are and how they affect high-yield savings accounts

Photo by Markus Spiske

Photo by Markus Spiske

What are federal interest rates?

Generally speaking, federal interest rates are lowered when the economy experiences a lack of growth or a weakening period. Though the Federal Reserve doesn’t directly correlate with interest rates on various types of savings accounts, banks do tend to adjust their interest rates as the Federal Reserve makes changes in their own rates. 

The Federal Reserve usually sets a range for target interest rates as a way to indicate the current economic climate. Last updated on September 18, 2019, at a 0.25% decrease, slashing this rate is meant to help boost the economy by encouraging borrowers to take out low-interest loans. In theory, more loans mean more jobs and more economic growth. 

Interest rates today and your high-yield savings accounts

Appealing to people who want to grow their savings without the risk of investing, high-yield savings accounts have slightly higher interest rates than a standard savings account—which usually doesn’t offer high interest.

The interest rate on high-yield savings accounts is typically at least 2%, though the exact rate depends on your bank and credit history, as well as the rate set by the Federal Reserve. 

Since banks are in charge of balancing their own needs, they set their rates to attract new customers and obtain deposits, while paying as little as possible to meet consumer demands. 

Banks profit off of the difference between the interest rates paid to them on loans and what they pay in interest on deposits. As interest rates today decrease, your money might be subject to lower interest than when you first opened your account, which would mean smaller earnings for you. 

That’s why it’s important to check in on your accounts and see how interest rates have changed for your savings. As an end to this period of lowered interest is difficult to predict with certainty, you might want to consider other options.

How to save money with interest rates today

If your high-yield savings account isn’t cutting it, there are other low-risk ways to put your savings to work.

1. Invest in a savings bond

Savings bonds can be viewed as old school, but are still completely viable options for people seeking a guaranteed return on their investment. Technically, a loan to the U.S. Government, savings bonds accumulate interest throughout your bond in return for the government’s ability to spend your money on federal operations. 

A savings bond is for investors who can commit to a period of time without access to their funds. Just as investing in a CD or mutual fund might not be best for people who need immediate access to their money, savings bonds can only be redeemed after a minimum of one year.

The process of acquiring a savings bond is a little more difficult than it used to be, as traditional paper bonds aren’t issued as of 2012. That being said, you can still get them with your tax refund or purchase one online. After creating a TreasuryDirect account, you can link your bank account and purchase bonds.

2. Get a CD

Short for Certificate of Deposit, CDs are a low-risk way to make a return on the money in your savings account. Though changes in the interest rate set by the Federal Reserve can still affect the interest rate of CDs, they’re a viable alternative to a savings account that isn’t making any money. 

Many CDs have fixed rates and set terms for the duration of the CD, as opposed to the variable rates for which many savings accounts are subject to change. That being said, a CD might not be the right choice for you if you need immediate access to your savings. If you take out funds before the term of the CD ends, you’ll probably be subject to fees.

Looking to put your money into a CD? Online banks typically have the best rates, followed by credit unions and then brick-and-mortar banking institutions, though your best option could be through any of the three. Check with your bank and online for CD programs, weighing the required deposit amount, annual interest rate and duration of the CD to decide the best option for you.

3. Invest in a mutual fund

If you’re uncomfortable with the risks associated with investing in the stock market, consider investing in a mutual fund. The idea behind a mutual fund is that investors’ money gets pooled together and managed by professional investors. 

Mutual funds have a balancing factor that could make them a safer bet than many other investments associated with the stock market. Including stocks, cash bonds, and other assets, mutual funds combine a diverse array of investments to bring steady returns. 

You can invest in a mutual fund through an online brokerage, or invest directly with a company like Vanguard or BlackRock that creates their own mutual funds.

The Financial Gym Team