Even with falling interest rates, high-yield savings accounts maintain this major advantage over the best CDs.

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The Federal Reserve recently lowered the federal funds rate for the first time in four years, meaning borrowing money should become more affordable. The downside to this move is that interest rates on savings accounts and CDs will also decrease.

Some see this as a sign that they should open a CD now before rates fall even further. This is an option to consider. But before you make your decision, you should compare the guaranteed interest rates of the CD with the greater advantage of the savings account.

It’s hard to put a price on access to your money

CDs lock in your interest rate for the life of the CD, but the tradeoff is that you lose access to your money during that time. Technically, you can remove it sooner if you need to. But you will pay an early withdrawal penalty. This typically equates to several months of interest payments. This makes CDs less than ideal for emergency savings and money you might need at some point during the life of the CD.

Savings accounts, on the other hand, generally allow you to withdraw your money when you need it. Some banks impose a limit on the number of free monthly withdrawals, which was once required by federal law. The government gave up on this during the pandemic. Some banks have since removed this measure or increased it above the previous limit of six monthly withdrawals.

Because of this freedom, savings accounts don’t lock in your interest rate. You will start earning less interest as soon as the bank lowers its rates. But the difference may not be as significant as you think. If you have $1,000 in savings and rates go from 4.50% to 4.00%, you’ll only get $5 less per month.

How to decide which account is best for you

The type of account that’s right for you right now depends on what you plan to use the money for. You should always keep emergency funds in a savings account because you never know when you’ll need them. It’s usually a good idea to also keep any money you plan to spend over the next few years in a savings account.

If you go this route, choose a high-yield savings account with an online bank. This won’t prevent you from receiving rate reductions, but it will ensure that you continue to receive a rate above the national average.

A CD is still an option if you don’t need your money in the next two years. But it’s probably not the best option for saving money in the long run. Consider investing these funds to earn a higher rate of return.

A retirement account is a good choice for savings that you don’t plan to use for decades. It comes with valuable tax breaks that could help you save money today or in retirement. However, if you plan to use your money before age 59½, consider keeping it in a taxable brokerage account instead. Unlike retirement accounts, these accounts don’t charge you a 10% early withdrawal penalty if you’re under this age. But they also don’t offer the same tax breaks.

You can also spread your money between multiple accounts. Just make sure you think about the purpose of each amount of money so you can best decide where to put it.

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