You’ve seen the headlines: the Federal Reserve is changing the federal funds rate, and the move is impacting most banks and the interest rate banks can pass on to their customers. If saving is a top goal for you, nothing can compare to seeing interest rates rise. On the other hand, when rates are in a decline, it’s hard not to feel discouraged.
Despite rate declines feeling like the worst news ever, there’s a silver lining to changing interest rates: As a savings strategy, the interest rate on your account is not as important as you might think when aiming for aspirational goals.
This may be shocking, because many people like to choose their bank based off the interest rate the bank can provide, but it’s not all about the interest rate when it comes to saving for your aspirational goals. Earning interest off your baseline savings is often a nice bonus, but the bulk of your savings is made up by how much of your income you commit to set aside. If you’re feeling stunned by this revelation and wondering how you’re supposed to reach your savings goals without a killer interest rate, we’re going to tackle exactly that in the remainder of this article — 7 additional, and possibly more effective, strategies that will help you save.
1. Know the best place to save for each of your money goals.
Every one of your savings goals has a timeline. It’s important to distinguish the timeline of your goals, because it can indicate the most optimized place for your money, based on the requirements of these goals.
Short-term goals require quick access to cash and don’t have a long enough timeline to recoup any losses — they need security and a protected downside. Therefore, banking products with FDIC insurance are often the best places to keep your cash for short-term goals.
Longer-term goals have something short-term goals do not: time. A longer timeframe means more capacity for risk, which can lead to higher average annual returns over the long-term.
While bank products provide interest and guaranteed security, they don’t offer the riskiness most long-term goals need in order to capture the higher average returns. Investment accounts are generally better places to capture the risk and return needed for achieving long-term goals.
Because bank products are typically better suited for short-term goals, interest earnings on these balances can be considered more of a nice-to-have bonus than something we should be heavily relying on for wealth accumulation.
2. Establish a budget.
Now that we know how much better suited bank accounts are for short-term goals, we can understand that the most important aspect of reaching these savings goals is so much more about the amount of cash you can stash into savings rather than the interest you can make on that cash.
Enter: The budget.
Establishing a budget will help you give each dollar you earn a purpose. By putting into place a bank account budgeting machine, you can easily delegate a set amount or percentage of your income into savings, and do all of this before determining the amount of spending money for the month.
In short: A budget can help you save before you spend.
3. Utilize multiple accounts.
If your bank allows you to set up multiple checking and multiple savings accounts, you can easily implement a bank account budget and begin to save for various goals at one time while tracking your progress for each goal.
A savings account could be perfectly suited for an emergency savings fund, annual vacation savings, your wedding next year, a short-term home renovation goal, or anything else you can imagine saving for. Utilizing multiple savings accounts, which is possible with Ally Bank, can add a degree of organization and boundaries to your savings strategy.
As an added bonus, and if your bank allows it, nicknaming your accounts with the name of each goal can help personalize your goals and give every dollar a purpose as you allocate money into the various accounts. Ally Bank makes adding nicknames super easy, and you can change the name as many times as you want — especially after you’ve achieved one goal and move on to another one.
Now that I’ve finished redecorating my home office, I just changed my “Home Décor” account to a “Wedding Savings” account in preparation of my southern Italian wedding next year.
4. Set up automatic transfers.
Automation can take the guess work and human emotion out of your savings strategy. The idea of “saving before you spend” is great and all, but ineffective if you can’t follow through with it.
This is why setting up automatic transfers from your checking to your various savings accounts can help take the emotion and human error out of a commitment to save.
If you think about it, you can’t earn any interest on money that’s not there — so automatic transfers might be the most important saving strategy to implement.
5. Get a higher rate with a CD.
A decreasing rate environment will impact the rates on certificates of deposit, but CDs typically still provide a higher rate than your standard savings account. Since CDs let you lock in these higher rates for a specified period of time, they can be a valuable tool.
Even if rates on savings accounts drop further, your CD rate won’t change until it matures, which can be 12, 24, 36 months or longer from the date you open it. Just keep in mind that CDs typically require you to keep your money locked in for the entire term period, or you risk paying a penalty.
6. Take advantage of lower rates on borrowing.
Changing interest rates always come with a downside and an upside. Decreasing interest rates may mean that you’re earning less on the money you have sitting in your savings account, but they also mean you can usually borrow money at a cheaper rate.
I typically try to avoid debt as much as possible, as saving up and paying in cash is the most ideal way to acquire anything. I also realize that, at times, financing may be the best option for someone at a crossroads in their life or business, and there are several ways to leverage debt in your favor and turn it into a savings strategy for yourself (e.g. financing a rental property and capturing rental income).
The opportunity cost of financing at lower interest rates versus potentially higher interest rates shouldn’t be your only consideration when taking on debt, however. The other variables of a borrowing opportunity to consider should be the long-term impact these monthly debt payments will have on your budget and whether you can sell what you’re financing for more than you have financed it for, in the future.
For those who have been sitting on a larger savings balance, waiting to take the leap into homeownership or building that business, a decreasing rate environment can create a more financially optimized time to take on a loan. Just make sure the monthly repayments and additional costs that come with this new venture also fit into your budget and saving strategy.
7. Pay off debt.
If a decrease in your bank’s interest rate has you torn on how to optimize every dollar, split the difference. Determine a savings rate that has you covering the necessary and inevitable savings goals, for instance, a well-stocked emergency fund or an account for the holiday season, and throw any excess cash towards the principal on your debt.
Most folks discount debt reduction as a powerful way to save and build financial freedom, but reducing your debt balance means you’re making great use of your extra money. This is because you’re paying down a debt you could probably be financing at a cheaper rate today, plus saving yourself from higher interest payments in the future.
A changing rate environment can bring obstacles and opportunities to your savings goals, but with these 7 additional savings strategies, you can still make great progress to your aspirational goals, while optimizing your money.
To start putting some of these saving strategies into action, visit Ally.com. Want to learn more about money optimization, personal development, and building a business? Check out my website wanderwealthy.com.
Tess Wicks is the founder of and voice behind Wander Wealthy, a podcast and YouTube channel for millennial women who want to make smart and savvy financial decisions. She is a wealth and mindset coach, who provides tools and education for online coaches and service-based entrepreneurs.