The Federal Reserve's most recent emergency cuts in March lowered interest rates to near zero and will impact savers, as banks are likely to also decrease their savings rates.
While borrowers may see a slight reprieve with the latest Fed move, savers will feel the pinch in their wallet as the interest rates in their accounts, including money market and certificates of deposit, will also fall as a response.
Interest rates were already at historic lows since the Fed slashed rates three times in 2019, and the central bankers have cut rates twice this month in response to the economic crisis brought on by the coronavirus outbreak.
Most important: Don't stop saving
Even though consumers are facing lower interest rates for the foreseeable future, building your emergency fund for unexpected expenses, such as medical bills, remains critical since 40% of Americans don't even have $400 of savings, says Bruce McClary, vice president of marketing for the National Foundation for Credit Counseling, a Washington-based nonprofit organization.
"Too few Americans have savings right now," he says. "The goal is to have three months of savings set aside no matter the amount of interest it is earning."
While rates have declined, economic and financial uncertainty has spiked, says Mark Hamrick, a senior economic analyst for Bankrate, a New York-based financial data company. A decent amount of savings can help allay fears if there is an uptick in unemployment or an interruption in income.
"As many workers are forced to shelter in place, particularly those who are not salaried employees, adequate savings will help to mitigate against the prospect of a personal cash crunch," he says.
Shop around for the best savings rates
While interest rates are declining, some online banks are still offering competitive rates – such as 1.85% interest for savings accounts and 1.9% for CDs via HSBC Direct. Even if you think your bank is offering a generous rate, keep an eye on your account, as the savings rate can change rapidly.
Daren Blonski, managing principal of Sonoma Wealth Advisors, says, "Online banks can be a great option and have to be very competitive because they are dealing with people who shop rates and don't see much value in the relationship with the banker."
Consider moving your savings into CDs
If you have amassed three to six months of emergency savings, consider allocating some of your future savings into a CD and lock in interest rates before the Fed cuts them again. Funds in a CD are typically not accessible without penalty for several months to a year or longer. Make sure it is money you do not need for monthly expenses.
Research CD rates because some banks will offer higher interest rates for longer terms and higher investment amounts.
CDs can be a great tool for your emergency money, Blonski says. One approach to structuring your emergency funds is to use a CD ladder, where you have various CDs that mature at different times and with different interest rates. Consumers can consider opening a CD for six months, another for one year and one for 18 months.
"By having varying maturities on the CDs, an investor is able to take advantage of changes in the interest rates," he says.
Laddering your CDs means you will have ongoing access to your money in set intervals, which allows you to either reinvest the money into another CD or "put the cash to work elsewhere," Hamrick says.
Having multiple CDs maturing at different intervals means you can often take advantage of higher interest rates, he says.
While lower interest rates are never appealing for savers, historically they have always risen again. Be patient, shop around for rates and find ways to save more of your earnings.
"Saving money isn't like running a sprint," Hamrick says. "It is more of a slow and steady marathon, particularly in the current low-interest-rate environment."
Create a habit of saving money on a regular basis.
"Regardless of interest rates, the most controllable variable contributing to your savings success is your consistency of saving," Blonski says.
Even if your savings is earning minuscule rates of return, it's far better than borrowing money at 15% to 20%, McClary says.
"You should be in a regular pattern of making a deposit every time you get paid," he says. "You should allocate a percentage of your income to savings. Pay yourself first."
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