Save and Invest

Here's why a CD may not be your best savings option when interest rates drop

Aleksandr Sumarokov | Twenty20

The Federal Reserve cut interest rates on Wednesday, the second time this year. But before you rush out to open a CD before rates fall, experts say you may want to consider all your savings options.

The central bank cut its benchmark short-term interest rate by a quarter of a point, from 2% to 1.75%. The Fed said in a statement that it would "continue to monitor" the economic outlook and "act as appropriate" to keep the U.S. economy growing.

But just because the Fed cut rates again doesn't mean that using CDs will automatically earn you a higher rate. In fact, Wealthfront CEO Andy Rachleff sees "serious reasons to take pause" before moving your savings into a CD.

"It might seem like a great idea to put your emergency fund in an account that earns a higher rate, but if that rate comes with the stipulation that the funds are locked up for a set period of time, that money is not of much value if the emergency for which you saved occurs in the interim," Rachleff says. Of course, the Wealthfront executive isn't totally unbiased, since his company does offer a cash account with a high APY.

But it is true: There are other options available that pay roughly the same interest as a CD and don't require you to lock up your money. "You can get the same return in a high-yield savings account or a money market account without having to lock your cash up for a period of time," Eric Roberge, a certified financial planner and founder of Beyond Your Hammock, tells CNBC Make It.

Sallie Mae currently offers one of the highest interest rates on a one-year CD available, according to Nerdwallet's review — 2.45% APY for deposits of at least $2,500. Don't have that kind of cash lying around? Barclay's currently offers 2.40% APY on 12-month CDs without requiring a minimum deposit.

But top high-yield savings accounts pay well too, and you can access your money right when you need it. For example, Virtual Bank, a division of IBERIABANK, offers 2.36% APY on its digital money market account and doesn't charge a fee if you keep a daily minimum balance of $100.

If you prefer a high-yield savings account, Vio Bank has an option that pays 2.52% on all balances, with a minimum of $100 required to open. Popular Bank's Plus Savings account, meanwhile, pays 2.50% APY on balances over $5,000.

Even digital wealth management companies Betterment and Wealthfront offer cash accounts with very competitive APYs of up to 2.44% and 2.32%, respectively, along with no fees, unlimited transfers, and FDIC insurance covering up to $1 million.

That said, Roberge notes that for many Americans, the hassle of trying to chase the best interest rates may not yield the biggest windfalls. "The good news here is that you are less likely to make a downright poor financial decision in trying to find the absolute highest rate on a savings account," he says.

"But you will probably create a lot of work for yourself and make yourself crazy by trying to switch savings accounts every time someone comes out with an offer that is 0.01% better than what you currently have," Roberge adds.

Yet it's still important to have high-yield savings, something most people aren't using. Just 14% of Americans have a savings account that pays more than 2% APY, according to a Bankrate survey.

Let's say you have $1,000 in your savings account at a brick-and-mortar bank earning the average interest. After five years, you'd earn about $14. But if you save your money in an online savings account that earned just 2% APY, you'd have $104 at the end of five years.

And the bigger your balance, the more it adds up.

Whatever option you choose, make sure you read the fine print before opening up an account so that you understand what's happening to your money and that you're not stuck paying any unexpected fees.

Don't miss: Here's how the Fed's rate cut will affect your high-yield savings account

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