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As rates fall, get more for your money

By Peter McDougall of

A decline in interest rates means you’ll earn less in a savings account, so look for higher yields elsewhere.

The federal funds futures market shows a 65% chance that the Federal Reserve’s Federal Open Market Committee, or FOMC, will cut its funds rate to 0.25% during the upcoming Dec. 15-16 meeting. That would take the federal funds rate below 1% for the first time ever and could lead to less interest earned on savings accounts.

The federal funds rate is the interest rate target set on interbank loans by the FOMC. A lower funds rate makes it cheaper for banks to borrow from one another, but it also means your bank will likely cut the interest rate on your savings account.

If rates start to fall and you're looking for a better yield on your cash, here are a few alternatives to consider.

Certificates of deposit: Rates offered on certificates of deposit, or CDs, are often much higher than what you can find on a savings account. The national average for a one-year CD is 2.26%, whereas the average interest on a savings account is a measly 0.38%. Longer-term CDs offer higher rates -- a five-year CD averages 3.17% -- but even short-term CDs offer better rates than simple savings. The average rate on a three-month CD is 1.53%, almost four times the average interest rate for savings. (You can find rates near you by heading to the CD section of the Web site and entering your ZIP code.)

CDs offer better rates than savings largely because of the restrictions banks place on your money. For starters, you can't touch it until your CD matures. If you do, you'll pay a stiff early-withdrawal penalty that can leave you with less money than when you started. CD laddering is one way to get around this accessibility issue. A CD ladder can provide access to your funds while still taking advantage of longer-term rates. For more on setting up a CD ladder, read here.

Money market accounts: Money market accounts, or MMAs, earn almost twice as much as savings accounts, at an average of 0.82%. These accounts tend to have higher minimum balances than traditional savings accounts (often above $1,000), but also limit the number of allowable transactions per month -- six in total, and only three for writing checks. For this reason, you may not want to set up an MMA for your bill-paying money, but MMAs are a much more flexible alternative to CDs if you'll need greater access to your cash than a CD ladder can provide.

Rates on MMAs also vary greatly among lenders so consider hunting around for the best offers. In particular, online banks tend to offer higher rates than traditional brick-and-mortar banks. To look for rates from both types of lenders, enter your ZIP code in the MMA section of the Web site.

Money market funds: Money market funds are different from MMAs -- MMAs are an interest-bearing deposit account whereas money market funds are a type of mutual fund that deals with short-term debt and aims to keep the share price steady at $1. Both MMAs and CDs are guaranteed by the Federal Deposit Insurance Corp., which insures up to $250,000 per account holder per institution. Money market funds, on the other hand, are not insured by the FDIC. There is, however, a temporary plan recently implemented by the Treasury Department that guarantees a minimum $1 share price in participating funds.

If you are willing to take on a little more risk, money market funds generally offer higher yields than savings accounts without the same type of restrictions as MMAs and CDs. For example, Vanguard's Prime Money Market Fund has a 2.63% return so far this year, and TIAA CREF's Money Market Fund has a 2.62% increase.

Calculators: Access to our Savings, Mortgage, Auto Loan and Personal Finance Tools.

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