The coronavirus pandemic has upended life around the world, threatening peoples’ health and causing countless disruptions to their daily lives. But if you are able to take the time to reassess your savings strategies, a certificate of deposit can be a solid way to grow your funds right now.
Savings account rates are dropping and might stay low for a while, but you can lock in solid rates on online certificates of deposit — before those drop, too. Once you open a CD, you can benefit from that fixed rate for the term of your choosing, generally from six months to five years.
Having a CD rate far above the national averages, which are currently 0.46% for a one-year term and 0.90% for a five-year term, can mean saving more money faster than with most savings vehicles.
Act now for high CD rates
The Federal Reserve cut its benchmark rate by a full percentage point, to nearly zero, on Sunday. And banks will likely follow by slashing rates on savings and CDs.
Online banks tend to have higher CD rates than traditional brick-and-mortar banks, but they respond more quickly by raising or dropping yields based on Federal Reserve rate changes. In February, you could easily find one- to five-year online CD rates at or above 2% APY.
After the Fed lowered rates March 3, online banks started to drop rates as well. There are still some online banks with CD yields above 1.50% APY, but this could change in the next few days. (See more details about high-yield CDs.)
High-yield savings accounts at online banks have been dropping rates, too. Some still earn above 1.50% APY, but unlike CDs, these rates are variable and subject to change at any time.
“Anything between a one- and five-year [CD] can be a good solution [for some of your savings] if your goal is to preserve your money and to keep up with inflation,” says Derek Brainard, director of financial education at AccessLex, a nonprofit that helps law students with financial advice.
How CDs can fit into your financial plan
CDs can make sense if you’re earmarking funds for a big purchase in the next few years, such as a car or a home — while keeping them safe from the volatility of the stock market. In general, CDs are most suitable for savings you can keep untouched for several months or years in exchange for a consistent return.
But not all savings are made for a CD. They don’t provide the long-term growth needed for retirement savings, for example. And emergency funds tend to be best left in a regular savings account, so you have easy access when you need them. (Not sure what an emergency fund is? Read about how they work.) If you want some of those savings to earn a better rate, you could consider a no-penalty CD. Unlike a standard CD, these don’t charge a fee if you withdraw the cash before the term is up.
“What adds to the motivation to lock in even modest rates right now is just the several layers of uncertainty that are surrounding current events, both domestically and internationally,” Brainard says.
Low rates are here to stay
“The Fed went all out on Sunday. That’s what they had to do,” says Ryan Sweet, economist and director of real-time economics at Moody’s Analytics.
In a recent statement, the Federal Reserve cited the effects of the coronavirus outbreak weighing “on economic activity in the near term and pos[ing] risks to the economic outlook.”
The Fed’s “rates are going to remain rock-bottom until the second quarter of next year, if not longer,” based on Moody’s Analytics current projections, Sweet says.
That means it’s likely savings account rates will remain low for some time, eventually below that of CDs. Instead of leaving all short-term savings in an account with a lower rate, CDs offer an opportunity to keep some of it at a rate above 1% or even 1.50%.