Ken Tumin
Ken Tumin, founder of DepositAccounts.com (now part of Lending Tree), which monitors interest rates and various developments at about 15,000 banks and credit unions.
With interest rates at their highest in decades, it’s been easy for savers to safely earn interest on their money with annual percentage yields (APYs) over 5%. But this September, the Federal Reserve cut its benchmark short-term interest rate for the first time since March 2020 in an effort to avoid an economic slowdown. Banking expert Ken Tumin now expects a series of gradual rate cuts to the 4.25%-to-4.5% range over the next six months to a year. He also warns that rates could go much lower than that if unemployment spikes and/or we have a deep recession.
What all this means for savers: The fat yields you enjoyed at your bank, credit union and/or brokerage firm are shrinking and will fall further when short-term interest rates do. You’ll still be able to beat inflation, recently under 3%, but you’ll need to make savvy choices about where to stash your cash or else you risk earning hundreds or thousands of dollars less on your savings in the coming year.
To help you, Bottom Line Personal asked Tumin about the best strategies to earn interest on money in the current environment, as well as which financial institutions offer the best deals on certificates of deposits (CDs)…rewards checking…high-yield savings and money-market accounts.
In exchange for locking up your money for a set period, a CD lets you earn interest at a fixed APY. That buys you additional time to earn interest on your money at today’s higher APYs even as interest rates fall.
Strategy: Stick with one- or two-year CDs. Yields on longer-term CDs are significantly lower and not worth locking up your money for that long. Best one- and two-year CDs available from banks and easy-to join credit unions now…
Careful: Some institutions are marketing “flex” CDs that offer the worst of both worlds in a falling-rate environment. Not only can you not access your money without steep penalties, but the APY you receive isn’t even guaranteed. Example: The online bank Amboy Direct is marketing a two-year CD with a 5.36% APY. But it’s actually a two-year “Treasury Index” CD, which means your rate is tied to the yields on three-month US Treasuries and changes quarterly.
Strategy: Purchase an add-on CD as protection against steep rate cuts. Standard CDs allow you to deposit funds only when you open the account. An add-on CD lets you make additional deposits throughout the CD’s term. You lock in a certain APY initially, then any extra money you add in the future earns that same yield regardless of where interest rates are. If you open a long-term add-on CD with a small initial deposit, it can be very beneficial in case there is an extended period of low rates. Example: In 2007, interest rates were over 5%. They fell to near-0% in 2008 and stayed there for seven years. Best add-on CD now…
These accounts are a good choice if you need immediate access to your cash. But since their APYs typically shrink when interest rates are cut, be prepared to move your money around to get the best rates. Also, be aware that many institutions limit consumers to six withdrawals a month from these types of deposit accounts.
Strategy: Check online and regional banks with promotions for new customers. If you are willing to do all or most of your banking electronically, they tend to pay substantially higher yields than large brick-and-mortar banks such as Bank of America and Chase, even in a falling-rate environment. Best nationally available high-yield savings accounts now..
Strategy: Rate shop at the financial-technology firm Raisin.com. Raisin has partnered with many banks and credit unions to offer multiple federally insured savings and money-market accounts. You register for free with Raisin…choose which banks’ products you want…then do all your banking through Raisin’s website. Why this is an advantage: Consumers typically don’t bother to move their money if a different bank offers a more attractive APY. That’s because it’s a hassle to fill out all the paperwork to open a new account, create new passwords and transfer funds. Raisin allows you to complete this process in minutes so you can maximize the yields on your cash.
Raisin.com offers an OptimumBank Money Market with a 5.21% APY, $1 minimum deposit, no monthly withdrawal limits…and Western Alliance Bank +1 High-Yield Savings with a 5.2% APY, $1 minimum deposit and no monthly withdrawal limits.
These accounts generally offer the highest rates available on FDIC-insured accounts without having to lock up your money for months or years. APYs tend to drop more slowly than other deposit accounts in falling-rate environments.
Strategy: Open a high-yield checking account at an easy-to-join credit union. These are best for consumers who are comfortable doing all their banking online through wire transfers, paper checks and networks of affiliated ATMs (fees are typically refunded up to $25 per month). You must meet strict monthly usage requirements such as making 10 to 15 debit card transactions…paying at least one bill online…and having at least one recurring direct deposit. Best high-yield rewards-checking account now…
These mutual funds, available at your brokerage firm, invest mostly in very short-term US Treasuries and you have access to your money without restrictions. The yields may not be as good as the best rates on bank deposit accounts, but the income you receive is exempt from state and local income taxes.
Strategy: Consider these funds if you live in a high-tax state such as New York or California. Caveat: These funds are not FDIC-insured like deposit accounts, but losses are extremely rare. Brokerage firms make sure the funds maintain a stable price of $1 per share. In addition, the assets held in the Treasury funds are backed against default by the full faith and credit of the US government. Best federal money market mutual funds now…
*All rates are current as of September 12, 2024.
