Since 2022, savers have enjoyed the highest interest rates in over a decade. However, with inflation softening, the Fed cut rates in September 2024, lowering the federal funds rate to between 4.75% and 5%.

So, where will be the best place to keep your savings as interest rates drop?

Even if you don’t earn a high rate of return, it’s essential to keep saving despite low interest rates. You may consider a high-yield savings account, certificates of deposit (CDs) or bonds.

Taking other steps to improve your finances is also a smart move after rates decrease. Paying off high-interest debt and contributing to retirement can help you build wealth even when rates are low.

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What are interest rates?

When a person or institution borrows money, the lender typically charges interest to offset the risk of the loan.

Interest is often expressed as a percentage, known as an interest rate. There are two types of interest rates to look at: annual percentage rate (APR) and annual percentage yield (APY).

APR only shows the interest on the original loan, while APY factors in compounding. Compounding is when interest is calculated on both the principal and previously accrued interest. Since most savings accounts have compounding interest, APY is usually the rate you want to use to determine how much you’ll earn from your savings.

So, how does interest work on a savings account?

When you deposit money into a savings account, the financial institution uses it to create loans. Because the institution is essentially borrowing your money, it will pay you interest in return for you keeping your funds there.

What to do when interest rates are low?

Keep saving

Although earning lower returns on your savings can be discouraging, it’s important to continue building wealth, even when rates are low.

If you’re new to saving, start by creating an emergency fund with three to six months’ worth of necessary expenses. This fund can prevent you from taking on debt if you lose your job or run into unexpected bills.

Here are a few quick tips to bulk up your savings:

Schedule direct deposits to your savings account to save a portion of each paycheck.
Identify areas where you can save, such as using less water or cooking at home more.
Set a “no spend” day or week where you try not to spend money during that time.
Buy generic labels instead of name brands.
Set savings goals and regularly remind yourself why you want to save.

Create a budget

A budget helps you plan where you want your income to go. You can assign a job to each dollar you earn to ensure none goes to waste.

With a budget, you can set limits on how much you spend in certain areas, like groceries or entertainment. It can also help you decide how much of your paycheck you set aside for savings and extra payments.

There are several budgeting methods you can use, including the 50/30/20, zero-based budgeting and the envelope method. Try out different types of budgets to see which one works best for you. You can also look into the best budgeting apps to help you build your budget, set goals and track your progress.

Once you set your budget, track your expenses to make sure you stay within your limits and identify any areas that need adjustment.

Look into online banks

A high-yield savings account at an online financial institution may provide a better interest rate than a brick-and-mortar bank.

“My general rule of thumb is if you’re going to use that money in the next three years, we want to keep it somewhere safe and accessible,” said Kendall Meade, certified financial planner and financial therapist at SoFi.

“So, for your emergency fund, that might mean a high-yield savings account. Even if interest rates are lower than they have been, that will still earn more than your traditional bank account.”

Online financial institutions often come with other benefits, such as welcome bonuses, budgeting tools and overdraft protection. Some even let you automatically round up your debit card purchases and send the spare change to savings.

Consider a CD ladder

“If you’re trying to lock in interest rates — maybe you’re expecting rates to go lower — you can also consider a CD,” said Meade. ‘It’s just important to realize that CDs do have a penalty if you take that money out early.”

Since you usually have to leave your money in the account until maturity, certificates of deposit typically don’t offer much liquidity. However, a CD ladder may help you create more flexibility while still benefiting from locking in higher rates.

Instead of investing all of your money into one long-term CD, you can open multiple CDs with different terms. As each CD matures, you can decide whether to roll the principal and interest into a new CD or cash it out to use for something else.

When building a ladder, you may want to consider opening CDs at multiple banks to take advantage of the best CD rates for each specific term.

Make sure you’re not paying fees

You want to get the most out of your savings, especially when interest rates are low. Bank fees can quickly add up and eat into your reserves, which results in less compounding interest over time.

Check your bank’s fee schedule or account disclosures to see if it has any hidden charges or balance requirements. You can also review past statements to see if your bank has charged you any fees that you could avoid in the future.

Take a look at some of the best free checking accounts to find banks with minimal fees.

Pay off high-interest debt

Saving money while trying to pay off high-interest debt, such as credit cards or signature loans, can be a challenge. So, the sooner you get out of debt, the faster you can progress toward your savings goals.

Your first step should be to stop charging purchases to credit cards with an outstanding balance. You may also want to consider debt consolidation to potentially lower your interest rates and reduce the number of payments you need to make.

Next, you’ll want to decide how to tackle your debt. Two of the most common strategies are the snowball and avalanche method. With the snowball method, you pay the smallest debts off first. However, with the avalanche method, you prioritize the debts with the highest interest rates.

Once you decide which method to use, pay as much toward your debt as possible according to your budget.

Consider bonds

When a company or the government wants to increase its capital, it can issue bonds and sell them to investors. A bond represents the loan that the investor makes to the issuer. In exchange, the issuer pays the borrower regular interest payments.

Bond prices usually move opposite of interest rates, which means they may be an excellent investment if you expect the Fed to lower the benchmark rate.

However, bonds are slightly more risky than other savings options. If the issuer defaults on their payment, you could lose some or all of your investment. This is more of a risk with corporate bonds vs. treasury bonds.

Bonds are usually best if you plan to hold them until maturity. While you can sell them on the secondary market, bonds often fluctuate in value.

Contribute to retirement

Contributing to retirement accounts prepares you for the future while reducing your tax liability.

A 401(k) is the most common type of retirement account. It’s an employer-sponsored plan that defers taxes until you withdraw the money. Many employers match contributions up to a certain amount, so make sure you contribute at least enough to get the full employer match.

An IRA is another type of tax-advantaged retirement plan. With a traditional IRA, you can deduct contributions from your taxable income but have to pay taxes when you withdraw the funds. With a Roth IRA, on the other hand, you pay taxes on your contributions upfront and can’t deduct them. However, it may be more beneficial in the long term because you can withdraw the money tax-free after age 59 1/2.

Compounding growth makes time your best friend for retirement planning — so the earlier you can start saving, the better.

Bottom line

Although we’re beginning to see interest rates drop, it’s important to keep saving. Consider keeping your money somewhere safe, such as a high-yield savings account, CDs or bonds. You can also work toward improving your financial health by paying off high-interest debt and contributing more to retirement accounts.

Editorial Disclaimer: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airlines, hotel chain, or other commercial entity and have not been reviewed, approved or otherwise endorsed by any of such entities.

This content is for educational purposes only and is not intended and should not be understood to constitute financial, investment, insurance or legal advice. All individuals are encouraged to seek advice from a qualified financial professional before making any financial, insurance or investment decisions.

Note: While the offers mentioned above are accurate at the time of publication, they're subject to change at any time and may have changed or may no longer be available.

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Where to put your savings when interest rates are low