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How savers should deal with declining interest rates

What interest rate cuts mean for your money

The interest rate environment has made an about-face this year, leaving savers scrambling to rebalance their strategies. 

Coming into 2019, it had appeared that interest rates would keep rising. But early on the Federal Reserve paused its tightening campaign, and by summer it had reversed course and started loosening rates again. The Fed has cut the federal funds target rate two times in 2019, and at least one more rate reduction appears likely. 

Taking this into account, there is a fair amount of uncertainty regarding how much lower rates will go. For savers who want to maximize their returns, it's time to adopt a strategy that not only takes into account the chances of a long period of falling rates, but also the possibility that the interest rate environment could shift again in 2020. 

The following steps should help savers maximize the yield on their savings in a falling rate environment, with minimal downside if rates surprise us again.

Open an online savings account

Regardless of what direction rates are taking now, some portion of your savings should be in a savings account. It's a safe place to keep the money you've stashed away for emergency expenses and short-term goals.

You want an account that earns as much interest as possible, an online savings account is your best option. The average rate for online savings accounts has a history of exceeding the average at brick-and-mortar banks, usually by a significant margin. This margin has been widest when rates were rising, but it has also remained pretty broad when rates fell or bottomed out — as was the case when fed funds rate was parked near zero after the Great Recession. During those years, the average online savings account rate was close to four times that offered by brick-and-mortar banks.

When rates are falling, look for online savings accounts that have a history of offering competitive rates. It's common for banks to be aggressive on rates when they launch new online savings accounts — but as their account offerings mature, they tend to become much less competitive.

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Choose online savings accounts that make it easy to move your money. This way, if your account's rate declines more than others' do, you can quickly and easily move your money to higher-rate accounts at other banks.

Pick a savings account that doesn't have a minimum balance requirement, so you can move your money without worrying about low-balance fees. 

Finally, your bank of choice should offer options that let you quickly transfer money to other banks. Make sure transfers take place within one or two business days, and beware of small-transfer limits.

Open a no-penalty CD

Savings accounts can be disappointing when rates are falling. This is especially the case at online banks which tend to respond quickly to changes in the federal funds rate. As the Fed cuts rates, online savings account rates will generally follow. A certificate of deposit, or CD, has an advantage over a savings account when rates fall for the reason that once a CD is opened, the rate is locked until it matures. 

The downside with a standard CD is that if you access the money before maturity, you have to pay an early withdrawal penalty. The no-penalty CD eliminates this downside. You have free access to your money in a no-penalty CD before maturity. The only exception is the first six days after the CD is opened. Regulations limit access to any CDs during this time.

No-penalty CDs are not a common product, but a few online banks and credit unions have started to offer them in the last year. It's most convenient to have both a no-penalty CD and an online savings account at the same bank. In this case, you can easily open no-penalty CDs using money from your savings account. 

Anytime you need the money, just close the no-penalty CD and move the funds back to the savings account. Look for no-penalty CDs with the longest term to benefit from the rate lock.

Open a standard CD with a mild early withdrawal penalty

The downside with no-penalty CDs is that the rates are often not much higher than online savings account rates. Standard CDs typically offer higher rates than savings accounts and no-penalty CDs. Also, standard CDs have longer terms, which can be useful in long periods of falling rates. Choosing a standard CD for a portion of your savings can be a useful strategy when rates are falling.

The issue with standard CDs is that if you need to access your money before the CD matures, it can be costly. The early withdrawal penalty can cost you some or all of the earned interest.

If the interest rate environment changes and rates start rising again, you may want to move the CD money into a higher-rate account. That's the benefit of choosing CDs with mild early withdrawal penalties. This minimizes the cost of moving your money. 

For CDs with terms over two years, look for early withdrawal penalties that are no higher than six months of interest.

Open an add-on CD

With a standard certificate of deposit, the only time you can deposit funds is when you open the account. After the initial funding, no further additions can be made until the CD matures. An add-on CD allows the holder to make additional deposits during the CD term.

This type of CD can be useful when rates are falling. Like standard certificates of deposit, an add-on CD's interest rate is locked until maturity. 

Here's your game plan: Open an add-on CD with the minimum initial deposit. If rates keep falling, put any additional funds that become available into the add-on CD. As interest rates decline, the yield you're getting on the add-on CD will be higher than the rates offered on new CDs. 

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If rates start rising again, don't make additional deposits to the add-on CD. That small minimum initial deposit limits the downside of having funds locked into a long CD term when rates are rising.

Add-on CDs are even less common than no-penalty CDs, but a few are being offered by online banks and credit unions. Look for add-on CDs with long maturity periods. A long term makes the add-on feature very beneficial when there's an extended period of low rates. 

Make sure to look for add-on CDs with minimal restrictions on adding deposits. Depending on the account, there may be restrictions on the number and the size of the additional deposits. Both can reduce the usefulness of an add-on CD.

Best strategies for savers

As we have learned, the future path of interest rates is highly unpredictable. Rates may be falling now, and it looks likely they will continue to decline in the near term. But nobody knows how long this downtrend will last. 

The best strategies for savers today are those that maximize yields if rates should continue to fall but allow for easy changes with minimal costs if rates pull another dramatic about-face.

Ken Tumin is the founding editor of The Bank Deals Blog at, where he has been covering bank deals and deposit investment strategies since 2005.

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