How to Save Money When Interest Rates Are Low

With interest rates hitting all-time lows, finding a savings account that offers great returns is a challenge. High-interest savings accounts are few and very far between these days. So, should you throw your money into the best account you can find and just wait for interest rates to rise or are there better ways to make the most of your deposits until the interest rate tide turns?

Here are a few strategies that can help you make the most of your money during this challenging rate environment.

CATEGORIZE YOUR FUNDS

Before you consider what to do with your money, it’s good to categorize it by how you intend to use it. Here are a few examples of categories you may use:

• Future purchases or events: It’s always better to save for a purchase or an event than it is to purchase on credit, so if you have money set aside for a dream purchase, nice work!
• Monthly expenses: Everyone has monthly expenses, and it’s often best to keep the money you’ll need to pay these expenses all in one place—usually the checking account, since that’s the account you can most easily make payments from.
• Emergency funds: Experts vary on this, but most would suggest that you have savings that will cover three to six months’ worth of monthly expenses or unexpected costs.
• Retirement: No matter how old you are, saving for the future is a good idea. In fact, the earlier you save, the better.

Regardless of what you’re saving for, it’s easiest when you automate your savings. If you’re able to, have your employer deposit your paycheck directly to your accounts, dividing it up so that the money you will use for monthly expenses goes to your checking account, a specific amount goes to your emergency fund, and a specific amount goes to any other savings accounts you are using to fund future expenses. If they can’t deposit it into specific accounts, you may be able to set up regular transfers to accomplish the same thing or just get really good at depositing your paycheck to the right accounts each pay period.

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FIND THE HIGHEST INTEREST RATES FOR YOUR SAVINGS

In general, you’ll find higher rates with money market accounts and certificates of deposit (CDs) than you will with a basic savings or checking account. That said, there have been cases where basic savings accounts offer higher rates.

Money market accounts and CDs are different account types, so you should be aware of how they work before you decide which to use. Money market accounts tend to offer lower interest rates than CDs but allow you full access to your money so you can withdraw funds a certain number of times per month without incurring penalties or fees. CD accounts tend to offer higher interest rates, but you will likely be charged a fee if you withdraw funds before the maturity date. The fee charged when you withdraw CD funds is usually based on interest earned.

If you’re saving up for something you intend to buy one, three, five, or ten years in the future, a CD may make a lot of sense because those are common terms for CDs. There are plenty of great CDs out there that may allow you to earn a higher interest rate on your money while also keeping you from touching the funds in the meantime.

An emergency fund is a way to prepare for unexpected expenses. Many people dip into the emergency fund to cover furnace repairs, car crises, home upgrades, etc. Others may not touch it for years but keep it around just in case they lose their job. If you tend to use a portion of the funds but rarely have to use the whole thing, it may make sense to keep some in a more-accessible money market account and the remainder in a less accessible but higher-rate certificate of deposit (CD). Every situation will be slightly different, so you’ll have to decide what arrangement you feel most comfortable with.

Some people like to shop around for the highest rates across various institutions, while others prefer to stay with the same institution and find the highest rates offered by their preferred institution. One thing to keep in mind is that rates are very fluid, so if you put all of your money into an account that is boasting a high rate one day, you may find that the rate is down below the competition on another day. So, if you do decide to rate shop, make sure you keep track of the rates so that you can move funds later as needed. This is why many people choose a financial institution that they know and trust and move their money into appropriate accounts within that institution with the understanding that the rates will fluctuate based on the interest rate environment.

PAY OFF YOUR LOANS

If you are paying high-interest rates on loans but aren’t earning substantial interest on your savings, you can save yourself some money by paying off your loans more quickly. The quicker you can cut those high-interest loans down, the less money you’ll pay overall.

To determine whether you should put the cash toward your loans, simply compare the interest rate you are paying on the loan with the interest rate you are earning on savings. If you are paying 4.5% on your loan and earning .5% on your savings account, it may make sense to put extra cash toward the loan. If you are earning 3.5% on your savings and paying only 3% on your loans, it makes more sense to keep your cash in savings, where you’re earning more. That said, don’t whittle down your emergency fund in order to pay off loans. You always want to make sure you’re protected in case of an emergency.

WHAT ELSE?

You’ll notice that I have not mentioned investing. This is not because investing is a poor choice but simply because I don’t specialize in that area. However, if you have significant cash reserves, above and beyond what you need for your current use and for emergency savings, you may want to look into investing. There are various ways to invest your money, whether in stocks, bonds, mutual funds, real estate, or even in local businesses. Your best course of action is to speak with a financial advisor before you make any big moves with your money. Assessing your savings needs and how you can use it to your greatest advantage will improve your financial position and your financial wellbeing in the future.

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About Sarah Swenson

Sarah is the vice president financial analyst at VSECU. She has been an employee of VSECU for over 24 years, starting as a senior accountant in the finance department, and has a background in public accounting. Her roles include financial reporting to the Senior Management Team and Board of Directors, regulatory reporting, asset liability management, budgeting management, and accounting compliance. She is a multi-generation native Vermonter and lives in Montpelier with her husband, daughter, and two Australian Shepherds.

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