Choosing between a fixed or variable interest rate can have a significant impact on your savings. Currently, interest rates on savings accounts, money market accounts, and certificates of deposit (CDs) are at their highest levels in years, making it a good time to maximize your savings. Understanding the difference between fixed and variable rates is essential.
Variable rates are commonly found in bank accounts like savings and money market accounts. The bank or credit union can adjust the annual percentage yield (APY) at any time without prior notice. On the other hand, CDs offer fixed rates for a specific term. For example, a 1-year CD may offer a guaranteed 5.50% APY throughout the entire year, regardless of changes in the Federal Reserve’s interest rates.
Opening a CD, particularly a longer-term one, is advantageous when you have surplus funds that you won’t need for a while and interest rates are high. By locking in the current high rates, you ensure your earnings won’t be affected by future rate decreases. However, remember that early withdrawal from a CD usually results in a penalty.
Variable rates are preferable when interest rates are expected to rise. High-yield savings and money market accounts have seen increases due to the Federal Reserve’s rate hikes. These accounts offer the opportunity to capture higher yields as rates continue to climb.
Currently, it’s predicted that the Federal Reserve may announce a rate pause, but the overall campaign of rate hikes may not be over. While variable-rate accounts may still be advantageous for a short while, it’s likely that rates will plateau and begin to decline once the Fed is finished raising rates. At that point, it may be wise to consider locking in a fixed-rate CD to secure higher returns before variable rates start to drop.
Ultimately, the decision between fixed and variable rates depends on your financial goals and expectations for interest rate movements. It’s essential to evaluate the current economic indicators and financial news to make an informed choice.