There are always numerous economic factors that impact our personal finances. However, over the past several months we have seen a rapid shift in the economy driven by changes to the federal funds rate, set by the Federal Reserve. The ongoing changes to this rate have a direct impact on your ability to grow your savings.
The frequent increases to the federal funds rate have left many individuals wondering about the best strategies for saving and growing their money. In this article, we’ll discuss the current Fed market rate adjustments, why it’s a good time to save in a Certificate of Deposit (CD), and what you should know about saving with a CD.
Understanding Current Fed Market Rate Adjustments
The Federal Reserve, often referred to as the Fed, plays a pivotal role in the U.S. economy by influencing interest rates and controlling the money supply. When the economy is strong and growing, the Fed tends to raise interest rates to prevent inflation from getting out of control. Conversely, when the economy is sluggish or in recession, the Fed lowers interest rates to stimulate borrowing and spending.
In recent years, we’ve seen the Fed make a series of rate adjustments, lowering rates to near-zero levels in response to economic challenges brought on by the COVID-19 pandemic. While these measures were aimed at providing relief and support, they also created an environment where traditional savings accounts offered minimal interest, making it increasingly difficult for savers to grow their money.
Over the past year and a half, we’ve witnessed a significant change of direction. In an effort to combat the rapid levels of inflation, the Fed has made several increases to the rate to help slow the economy. These rate changes are two-sided. Rising rates tend to slow borrowing because of increased interest rates on loans. On the flip side, an increase on deposit interest rates can have a positive impact on savings accounts.
Why It’s a Good Time to Save in a Certificate of Deposit
CDs are the perfect tool for achieving specific financial goals. Whatever your savings goals, investing in a CD is a wise strategy to help you achieve them.
As the Fed adjusts market rates, it’s important to adapt your financial strategies to make the most of the current environment. This is where CDs come into play.
- Stability and Safety:
CDs are considered one of the safest forms of investment. Your principal amount is typically insured by the FDIC (up to $250,000 per account), providing peace of mind.
- Fixed Interest Rates:
When you open a CD, you lock in a fixed interest rate for a predetermined period, which can range from a few months to several years. In the current moderate-rate environment, this means you can secure a higher interest rate than what’s offered by most standard savings accounts.
- Guaranteed/Predictable Returns:
With a CD, you know exactly how much you’ll earn at the end of the term, making it easier to plan your financial goals.
CDs can be part of a diversified savings and investment portfolio. You can stagger your CD maturities to ensure access to funds at different times while still benefiting from higher interest rates. CDs are also offered in multiple terms which allow for creating a strategy to capitalize on short (under 12-months) and long-term (1-5 years) options.
- Higher Interest Rates:
Compared to other traditional savings and checking products, CDs tend to offer significantly higher rates. These higher rates are offered because the financial institution knows the deposits are locked up for the life of the CD term, helping the bank manage its funds. Traditional savings accounts on the other hand are more liquid, meaning the customer can pull the funds at any time, which is riskier for the institution.
What to Know About Saving with a CD
Before jumping into the world of CDs, it’s important to understand a few key factors:
- Terms and Penalties:
Different banks offer varying CD terms, ranging from 3 months to 5 years or more. It’s essential to choose a term that aligns with your financial goals. Keep in mind that withdrawing funds from a CD before the maturity date often results in penalties.
- Interest Rates:
Shop around for the best CD rates. Note that some high rate offers require “new money” meaning funds for the account cannot already be held at the institution. They must be new funds added to your account at the time of opening the CD.
- Laddering Strategy:
Consider a CD laddering strategy. This involves opening multiple CDs with different maturities to provide regular access to your funds while still enjoying higher interest rates.
- Automated Renewal:
Most CDs will automatically renew at maturity (the end of the term). Be sure to understand the renewal terms and rates to make informed decisions.
- Compare Your Options:
Don’t limit yourself to traditional CDs. There are various types of CDs to explore to find the best fit for your financial situation.
The Fed’s market rate adjustments have made saving and growing your money easier. With rates rising, CDs offer a safe and stable way to grow your savings by earning higher interest than standard savings accounts. By understanding the nuances of CDs and their benefits, you can make smart financial decisions to safeguard and enhance your savings. So, whether you’re saving for a short-term goal or looking to grow your nest egg, consider the advantages of a CD in today’s economic landscape.
Grow Your Savings Now
While CD rates have been rising, economists are predicting an end to the Federal Reserve’s rate increase strategy. This change will level off the steady rising rates.