Certificate of Deposit-loving savers got a little relief in 2018 as the Federal Reserve raised its benchmark short-term interest rate four times, only to see the rate lowered three times in 2019.
So far in 2020, the Federal Reserve made a surprise announcement on March 3, lowering its interest rate by half a point, followed by an announcement on March 15 related to the economic threat of the coronavirus (COVID-19), lowering the fed funds rate to nearly zero. In these challenging times, savers may be wondering where to turn when it comes to growing their savings. Both savings account and CD APYs are affected by these decreases.
CDs won’t make you rich, but if you can grab the best CD rates on offer, you should be able to keep your money safely growing at close to the inflation rate. In other words, your savings shouldn’t be losing value.
Where to get the best rate on a CD depends, which is why it behooves you to shop around. Big banks can be pretty stingy when it comes to deposit rates of return. Online banks are aiming to steal as much business as they can and will offer higher rates to help meet that goal. It’s not just online banks that may be offering a competitive rate. Regional banks and credit unions also are competing for your banking dollars and will offer enticing rates on CDs.
Choosing the right CD is a function of APY, timing and your specific savings goals. Ultimately, you want to go with the bank that offers high rates in an FDIC insured account. That means depositors are protected up to $250,000 per ownership category, per bank. Credit unions are insured up to the same amount by the National Credit Union Share Insurance Fund. Look at the APY when comparison shopping. Otherwise known as the annual percentage yield, APY gives you the percentage you’ll earn on your investment after one year on a compounding basis.
When it comes to CDs, you have options. Certificates of deposit come in different maturities ranging on average from one to five years, although some offer shorter and longer terms. Rule of thumb: The longer your money is locked up in a CD, the higher the APY will be. But you do pay for that higher fixed return. Should the Federal Reserve resume raising interest rates, you could miss out on a better-paying savings vehicle. There also are penalties involved if you withdraw money from your CD early.