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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.
"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.
» Considering a new account? Here’s a list of the top savings 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.