How to save when interest rates are low or falling

Wondering what to do when interest rates are low? You’ve come to the right article. 

Riding the waves of a changing interest rate can feel a little rocky, and trying to save money when interest rates are low can seem like going against the current. But there are still ways to save (and earn) even when rates are falling.

First, let’s cover what an interest rate is. When it comes to savings accounts, your interest rate is the annual percentage of your balance that the bank pays you for keeping money in your account.¹ That’s why it’s sometimes called a savings interest rate. 

So why does your savings account sometimes have a low savings rate and other times a high savings rate? One reason is the Federal Reserve, called The Fed for short. It sets monetary policy—among other things. And one of the ways it steers the economy through choppy or clear waters is by changing interest rates.²

So, when economic growth is low, the Fed might lower interest rates to incentivize spending by making it cheaper to borrow, giving the economy a boost. On the flip side, when the economy starts to grow, the Fed may bump up interest rates to slow spending and avoid inflation.²

As the Fed adjusts interest rates, it could impact the rate of your savings account.

It might feel like when savings rates are going up, everything is smooth sailing. But it’s also good to know that even when savings rates go down, you’ve still got options to help you save successfully. Plus, these are things you can do in any rate environment to get the most out of your savings.

Here are some ways you can navigate the sea of changing rates:

Keep on saving

While interest is great, it isn’t everything. Saving money regardless of the interest rate is still important to keep up with your financial goals. A good way to start is to create an emergency fund, which is about 3 to 6 months worth of living expenses saved for unexpected expenses that might come your way.³ With an emergency fund saved up, you can continue your saving journey with a solid foundation.

It’s a good idea to keep your emergency fund in an account that provides FDIC insurance. That means your money is insured up to allowable limits so it's protected in the unlikely event of a bank failure.⁴ This is a great benefit to have even when interest rates are low. 

Eliminate existing bank fees

Some savings accounts might have monthly maintenance fees associated with them. It might be a good idea to check if your account has these fees, because that’s money that is getting taken out of your savings. The same goes for account minimums—if you don’t have a set amount in your account, some savings accounts might charge you. Instead, look for a savings account that doesn’t charge fees or have minimums so more of your money stays yours.

And while signing up for a new account without fees or minimums is a great option, you can also keep an eye out for common bank fees, like ATM withdrawal fees and paper statement fees, and try to avoid them. 

Consider CDs or CD laddering

Certificates of deposit, or CDs, are bank accounts that require you to save your money in the account for a set amount of time, called a term—like 6 months, a year or longer.⁵ While there are usually penalties for removing your deposit before the term ends, CDs can have higher rates than a traditional savings account because the bank can count on your money staying put for that set amount of time. Then when the term ends, you can take your savings and earnings out, or put them in another CD or account.

A big perk about using a CD to save, in any rate environment (but especially a low rate environment), is that the CD’s interest rate is typically fixed for the term. In other words, the rate won’t change. That means that even if the interest rate on a traditional savings account went down during this time, your CD interest rate would stay the same until the end of the term. So you get guaranteed returns from the CD interest rate that will stay the same until your CD term is up. 

Pay down debt

Savings account interest dropping lower can create an opportunity to refocus on paying down your debt. Saving money and paying off your debt are both important goals that you can work toward at the same time. However, if you aren’t paying off debt, the interest you owe might add up over time.⁶ This could end up costing you more in the long run than if you focused on paying off debt first and then set your sights on saving afterward.

Consider an automatic savings plan

A lot of savings accounts offer automatic savings plan options. Usually that means money is automatically deposited to your savings account from one of your other bank accounts, like your checking account, at a frequency you pick.⁷ After you set up how much and how often you want to move money to your savings account, the automatic savings plan does it for you. In other words, you can save money without needing to keep it top of mind.

An automatic savings plan can also help you budget your spending money. Say you decide to move $100 from your checking account to your savings account every Friday. Now you have a clearer picture of how much money you can budget for the week without dipping into the money you intended to save, because it moved to your savings automatically. 

Consider high-yield savings accounts

High-yield savings accounts typically have a higher savings rate than your traditional savings account, which means you could potentially maximize savings interest with this type of account.⁸ Even if your savings are already in a high-yield savings account, it might be worth it to check and make sure your interest rate is competitive with other high-yield savings accounts. 

You should also take into account the full value that your savings account is offering, like whether it has fees or minimums, if it offers an automatic savings plan and if it provides FDIC insurance. All of these aspects can make a big impact on your savings.

Contribute toward retirement savings

Regardless of low savings rates or high savings rates, it’s always a good time to think about putting money toward your retirement fund. Contributing to a 401K, Roth IRA or traditional IRA are all options for saving for your future. 

Interest rates may fluctuate. But understanding why savings interest rates are so low or high can help you be better prepared. You can also use these tips to plan what to do with your money when interest rates are falling, consider where you want to focus your financial planning and think about what the best accounts are for you.