When interest rates start to drop, many savers wonder if they should lock in a decent rate with a CD or keep their money in a high-yield savings account. Both options can help you grow your savings, but they work differently. Ultimately, the right choice will depend on your goals.
Let’s take a look at how falling rates affect these two popular savings tools. We’ll review the pros and cons of each and share tips for making the most of your money. This way you’ll have a clear idea of which option—or combination—works best for you.
Understanding the Basics
Before we dive into whether a high-yield savings or CD account is best, let’s take a closer look at each account type:
Both are safe, FDIC-insured options, but they serve different purposes. Knowing how they work is the first step toward making the right choice.
Why Falling Rates Matter
When rates are falling, banks typically lower the interest they pay on both savings accounts and CDs. This means:
For example, if your high-yield savings account currently earns 3.50% APY but the bank drops its rate to 3.00%, your interest earnings will decrease. On the other hand, if you open a 1 Year CD at 3.50% APY and the bank drops the rate of that CD to 3.00% the following month, you’ll still earn 3.50% APY until your maturity date.
Benefits of High-Yield Savings Accounts
While you can’t lock in a rate with a high-yield savings account, they do offer flexibility and convenience. Here are some of their distinct advantages:
However, it’s important to remember that if rates continue to fall, your earnings could shrink. If you’re saving for something far in the future, this uncertainty might be a drawback.
Benefits of CDs
CDs shine when you want stability. Here are some things that make them appealing:
The trade-off? Your money is locked in for the term, so a CD is not an ideal place to store emergency funds. If you need access to the funds before your CD matures, you’ll likely pay a penalty. Another potential downside is that you typically can’t add money to a CD. So, if you find yourself with additional funds you’d like to earn interest on, you’ll need to open another account. Some banks do offer add-on CDs that allow you to deposit additional funds during the CD term, but they can be hard to find.
Which Is Better for You?
There’s no hard and fast answer for which savings product is best—even when rates are falling. Whether a high-yield savings account or CD is better for you will depend on your unique financial situation. Here are some questions that can help you decide:
A Smart Strategy: Combine Both
It’s understandably hard to decide between a high-yield savings account and a CD. But the good news is that you don’t have to choose just one. Many savers use both. Consider this strategy:
This way, you can enjoy both accessibility and stability. It’s a balanced approach that works well when rates are unpredictable.
Extra Tips for Savers During Rate Drops
If you want to make the most of your money when rates are falling, consider these tips:
These strategies can help you stay ahead even when the market shifts.
Final Thoughts: Make Your Money Work Smarter
When interest rates drop, it’s important to think strategically. High-yield savings accounts give you freedom, while CDs offer stability. The best choice depends on your goals, but combining both can be a smart move. At Bank5 Connect, we offer competitive high-yield savings accounts and a variety of CD terms to fit your needs. Whether you want flexibility or guaranteed returns, we have solutions to help you make the most of your money—even when rates are falling.
Let’s take a look at how falling rates affect these two popular savings tools. We’ll review the pros and cons of each and share tips for making the most of your money. This way you’ll have a clear idea of which option—or combination—works best for you.
Understanding the Basics
Before we dive into whether a high-yield savings or CD account is best, let’s take a closer look at each account type:
- High-Yield Savings Account (HYSA): A savings account with a competitive interest rate, usually much higher than traditional savings accounts. Your money stays accessible, and the rate can change over time.
- Certificate of Deposit (CD): A time deposit where you agree to keep your money in the account for a set term (like 6 months or 1 year) in exchange for a fixed interest rate that won’t change during the term.
Both are safe, FDIC-insured options, but they serve different purposes. Knowing how they work is the first step toward making the right choice.
Why Falling Rates Matter
When rates are falling, banks typically lower the interest they pay on both savings accounts and CDs. This means:
- High-Yield Savings Accounts may see their rates decrease over time.
- CDs can lock in today’s rate for the entire term, protecting you from future rate drops.
For example, if your high-yield savings account currently earns 3.50% APY but the bank drops its rate to 3.00%, your interest earnings will decrease. On the other hand, if you open a 1 Year CD at 3.50% APY and the bank drops the rate of that CD to 3.00% the following month, you’ll still earn 3.50% APY until your maturity date.
Benefits of High-Yield Savings Accounts
While you can’t lock in a rate with a high-yield savings account, they do offer flexibility and convenience. Here are some of their distinct advantages:
- Easy Access to Funds: You can typically withdraw money anytime without penalties.
- Great for Emergency Savings: Perfect for an emergency fund or short-term savings.
- No Long-Term Commitment: If you find another account that has a higher rate or better perks, you can move your money with no strings attached.
- Online Banking Convenience: Most high-yield savings accounts allow you to manage your money online or through a mobile app, which is ideal for digital-savvy customers.
However, it’s important to remember that if rates continue to fall, your earnings could shrink. If you’re saving for something far in the future, this uncertainty might be a drawback.
Benefits of CDs
CDs shine when you want stability. Here are some things that make them appealing:
- Fixed Rate for the Term: Your interest rate won’t change, even if market rates drop.
- Predictable Growth: You can determine in advance exactly how much you’ll earn.
- Encourages Saving Discipline: Since withdrawals before maturity often come with penalties, you’re less likely to dip into your savings.
- Variety of Terms: Choose from short-term CDs for flexibility or long-term CDs for higher rates.
The trade-off? Your money is locked in for the term, so a CD is not an ideal place to store emergency funds. If you need access to the funds before your CD matures, you’ll likely pay a penalty. Another potential downside is that you typically can’t add money to a CD. So, if you find yourself with additional funds you’d like to earn interest on, you’ll need to open another account. Some banks do offer add-on CDs that allow you to deposit additional funds during the CD term, but they can be hard to find.
Which Is Better for You?
There’s no hard and fast answer for which savings product is best—even when rates are falling. Whether a high-yield savings account or CD is better for you will depend on your unique financial situation. Here are some questions that can help you decide:
- Do you need quick access to your money? If yes, a high-yield savings account would be a good fit.
- Do you want to lock in today’s rate before it drops? If yes, a CD makes sense.
- Are you saving for a specific goal with a timeline? CDs can work well for planned expenses like a wedding or vacation—just be sure to choose your term wisely.
- Do you prefer flexibility? If so, a high-yield savings account gives you freedom to move funds as needed.
A Smart Strategy: Combine Both
It’s understandably hard to decide between a high-yield savings account and a CD. But the good news is that you don’t have to choose just one. Many savers use both. Consider this strategy:
- Keep your emergency cash in a high-yield savings account for flexibility.
- Put extra funds into a CD to lock in a higher rate for guaranteed growth.
This way, you can enjoy both accessibility and stability. It’s a balanced approach that works well when rates are unpredictable.
Extra Tips for Savers During Rate Drops
If you want to make the most of your money when rates are falling, consider these tips:
- Shop Around for the Best Rates: Not all banks lower rates at the same pace. Compare options regularly.
- Consider Laddering CDs: Open multiple CDs with different maturity dates. This gives you access to your funds at regular intervals, as your CDs mature, while still allowing you to lock in attractive rates.
- Avoid Long-Term Commitments if Rates Might Rise Again: If you think rates could bounce back soon, stick with shorter CD terms.
- Keep an Eye on Fees: Make sure your high-yield savings account doesn’t have hidden fees—like a monthly maintenance fee—that could eat into your earnings.
These strategies can help you stay ahead even when the market shifts.
Final Thoughts: Make Your Money Work Smarter
When interest rates drop, it’s important to think strategically. High-yield savings accounts give you freedom, while CDs offer stability. The best choice depends on your goals, but combining both can be a smart move. At Bank5 Connect, we offer competitive high-yield savings accounts and a variety of CD terms to fit your needs. Whether you want flexibility or guaranteed returns, we have solutions to help you make the most of your money—even when rates are falling.