In this article:
- What Is a High-Yield Savings Account?
- How Often Do High-Yield Savings Rates Change?
- What to Do With Savings When Interest Rates Are Low
Interest rates on high-yield savings accounts are variable and can change at any time. More specifically, rates typically change after a Federal Reserve committee meets to adjust the federal funds rate. The account's annual percentage yield (APY) determines how much interest you earn on your money each year. The higher the APY, the faster your savings grow.
APY can fluctuate, however. If you opened a high-yield account when rates were high and now you've noticed a drop, you may wonder what to do when rates get too low, and even if a high-yield savings account is right for you.
What Is a High-Yield Savings Account?
A high-yield savings account is a type of interest-earning account that typically pays a much higher APY than a traditional savings account.
In late February 2023, the national average APY on standard savings accounts was just 0.35%, according to the Federal Deposit Insurance Corporation (FDIC). But plenty of banks now offer annual returns of well above 3% on high-yield savings accounts.
High-yield accounts can help you build your savings to reach your financial goals, such as making a down payment on a house, buying a car or paying for another significant expense. High-yield savings accounts are an appealing place to build an emergency fund or any other short-term savings you don't want to tie up in a certificate of deposit (CD) or an investment account.
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How Often Do High-Yield Savings Rates Change?
Rates on high-interest savings accounts are variable and can change at any time, often without notice. So, when you open your savings account at one rate, it likely won't stay at that rate forever. This can make it hard to predict how much interest you'll actually earn in any given year on your savings account.
Variable savings rates are linked to the federal funds rate set by the Federal Open Market Committee (FOMC), which sets monetary policy for the Federal Reserve. Banks tend to offer higher interest rates on their high-yield savings accounts—and lenders charge higher interest rates on loans and credit cards—when the federal funds rate is higher.
On the flip side, if the FOMC cuts the federal funds rate, it's generally a sign that the economy is contracting. As a result, banks typically offer lower deposit rates and lenders charge lower interest rates on debt.
What to Do With Savings When Interest Rates Are Low
When the APY on your high-yield savings account decreases substantially, you may wonder if there's a better place to stash your cash. Ultimately, the answer depends on your financial situation and goals. Here are options to consider:
- Keep saving. If you don't yet have money set aside for unexpected needs, a savings account can be a great tool to build an emergency fund—even when rates drop. The lower rate may not be enough to keep up with inflation, but if you earmark the money for a rainy day, it can help keep you afloat without relying on high-interest loans or credit cards. Financial experts recommend having three to six months' worth of your basic expenses in savings in case of an unexpected need.
- Shop around. If rates tied to your current high-yield savings account are dropping, it may be time to comparison-shop to see if you can get a better deal elsewhere. Online banks may offer better rates than traditional banks. So if you've never considered banking online, when rates drop in your current account, you may want to take a look. It's also good to know that FDIC-insured online banks are just as safe as traditional brick-and-mortar banks.
- Consider laddering certificates of deposit (CDs). CD laddering is a strategy worth considering when savings rates get too low for your liking. When you ladder CDs, you buy multiple CDs with different terms that mature on a staggered basis; for example, buying a one-year CD and a three-year CD simultaneously. As each certificate of deposit matures, you'll have money to use or reinvest. The trade-off is that your money is tied up for a specific time frame, which may not be ideal for your personal savings goals.
- Try investing. Arguably the riskiest alternative to a high-yield savings account is investing in stocks, bonds, crypto and the like. However, this might not be the best option if you can't afford to lose the money you invest. But putting your money into different types of investments might be an alternative if rates drop substantially on your savings account. If your savings rate drops, you're still earning interest on your money. Investing offers no guaranteed return.
Shift Your Savings Into High Gear
Cultivating good savings habits can help reduce or even eliminate the need to borrow money for an emergency or when you're between jobs. High-yield savings accounts can grow your money faster than a traditional savings account, helping to shift your savings into high gear.
Another good habit is monitoring your credit with Experian's credit monitoring service, where you'll have free access to your FICO® Score☉ and your Experian credit report. As you check regularly, you'll be able to see how your actions affect your credit score. You'll also be able to view the information on your credit report, which can help you decide which steps to take next with your money.
As a seasoned financial expert with a comprehensive understanding of high-yield savings accounts and related financial concepts, I bring forth my expertise to dissect the key elements discussed in the provided article.
High-Yield Savings Account:
A high-yield savings account is a specialized interest-earning account known for offering a significantly higher Annual Percentage Yield (APY) compared to traditional savings accounts. In late February 2023, the national average APY for standard savings accounts was a mere 0.35%, according to the Federal Deposit Insurance Corporation (FDIC). In contrast, high-yield savings accounts from various banks were reported to provide returns well above 3%. These accounts serve as a powerful tool for individuals striving to achieve financial goals such as making a down payment on a house, buying a car, or handling significant expenses.
How Often Do High-Yield Savings Rates Change:
The rates on high-yield savings accounts are variable and can change without prior notice. The article emphasizes that these changes often occur following meetings of the Federal Reserve committee, specifically when adjustments are made to the federal funds rate. The federal funds rate, set by the Federal Open Market Committee (FOMC), influences variable savings rates. When the federal funds rate increases, banks tend to offer higher interest rates on high-yield savings accounts, and conversely, a rate cut indicates a potential decrease in these rates.
What to Do With Savings When Interest Rates Are Low:
In the scenario where the APY on a high-yield savings account significantly decreases, the article suggests several strategies:
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Keep Saving:
- Despite lower rates, maintaining a savings account is crucial for building an emergency fund.
- Having three to six months' worth of basic expenses in savings is recommended by financial experts to prepare for unexpected needs.
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Shop Around:
- Comparison-shopping is advised, especially if rates on the current high-yield savings account are dropping.
- Online banks may offer better rates than traditional brick-and-mortar banks.
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Consider Laddering CDs:
- Laddering certificates of deposit (CDs) involves purchasing multiple CDs with different maturity terms.
- This strategy provides access to funds as each CD matures but comes with the trade-off of tying up money for specific time frames.
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Explore Investing:
- Investing in stocks, bonds, or other assets is presented as a riskier alternative but one that could potentially offer higher returns.
- Caution is advised, especially if the investor cannot afford to bear the associated risks.
Shifting Your Savings Into High Gear:
The article concludes by emphasizing the importance of cultivating good savings habits. High-yield savings accounts are positioned as instruments that can expedite wealth growth compared to traditional savings accounts. Additionally, the article suggests monitoring credit through services like Experian's credit monitoring, providing free access to FICO® Score and credit reports.
In summary, the article navigates through the dynamics of high-yield savings accounts, the factors influencing their rates, and strategies to adapt when faced with changing interest rate environments, all while promoting prudent financial habits.
