What are the best ways to save when interest rates are low?

In March 2020, the Federal Reserve cut emergency rates in response to the coronavirus pandemic, dropping the federal funds rate to its target range between 0% and 0.25%.

Annual percentage yields (APYs) on savings accounts and CDs, which typically track the Fed’s actions, have been dropping this past year. The pandemic’s economic effects, along with the consequential cut in interest rates, have made building on your savings account more challenging.

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What are the best ways to save money despite low-interest rates

Here are three tips for saving money while interest rates are low:

1. Open a high-interest savings account

With interest rates as low as they currently are, the last thing you want to do is leave money on the table. Increase your savings with a high-yield savings account rather than depositing your extra money in a standard savings account with a traditional bank.

While annual percentage yields (APYs) for these high-yield savings accounts are also lower than in recent years, you can still find accounts offering 0.35% to 0.40% APYs, which is about nine to 10 times higher than the 0.04% national APY found with traditional savings accounts.

Like certificates of deposit (CDs), high-interest savings accounts are FDIC-insured, but you are not locked into a term. You can withdraw your funds anytime you need them without incurring early withdrawal penalties.

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2. Take advantage of low refinance rates

After the March 2020 emergency rate cut, millions of homeowners looked to save money by refinancing their homes. According to ATTOM Data Solutions mortgage origination report, Q2 residential refinance mortgages totaled 1.69 million, marking a 50% rise over Q1 totals and a 100% increase over figures from Q2 of 2019.

Interest rates are beginning to fluctuate; however, the Federal Reserve expects rates to remain low during the economic recovery.

"Because interest rates are so low, it is very likely that refinancing directly translates to a lower payment even if you don't extend the loan term," said Brandon Renfro, CFP, professor and investment advisor. "That helps your budget while at the same time not negatively impacting your long-term financial growth."

Depending on how much equity you have in your home, you may be able to drop your private mortgage insurance (PMI) to save even more money.

Typically, you’ll need 10-20% equity in your home along with regular income and strong credit history. As you do your due diligence, factor in refinancing closing costs from 3% to 6% of the loan amount.

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3. Keep your cash working with CDs

Certificates of deposit (CDs) don’t have the luster they once did when you could find yields of 4% to 6%. According to the Federal Deposit Insurance Corporation (FDIC), CDs’ current average rate stands below 1%, although that number still outpaces the 0.04% APY that comes with a traditional savings account.

Still, CD laddering may be a worthwhile strategy to protect yourself as interest rates fall. CD laddering involves purchasing several CDs that mature at different intervals.

"A CD ladder is a great way to keep your cash working for you without necessarily tying it up," said Renfro. "By laddering your CDs, you can plan out the maturities to come due at regular intervals. If you don't need the cash when the CD matures, you can roll it into the next rung on the ladder."

Also, staggering your CDs terms allows you to take advantage of the highest APYs rates that accompany long-term CDs while maintaining liquidity as your shorter-term CDs mature.

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Next steps

"The first step is to decide that you are saving," said Renfro. In uncertain financial times like this, it isn’t as important where you are saving but that you are saving regularly.

Save your money where it’s safe and where it can grow, even if rates are currently low, although they won’t say this low forever.

To maximize your savings, consider opening a high-interest savings account online, which despite myths to the contrary, offers more bang for your buck than a standard brick-and-mortar savings account. Both high-interest savings accounts and certificates of deposit (CDs) are federally insured to protect your money.

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