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- The interest rate on my high-yield savings account has been dropping for months, but I know it’s because of the pandemic and the Fed’s interest rate cut.
- That’s why I’ve decided to leave my savings alone and not chase a higher rate — it’s not worth the hassle of opening a new bank account, changing my transfers, etc.
- A high-yield savings account is the best place for your savings even though rates are low — they’re still substantially higher than typical bank savings accounts.
- See Business Insider’s picks for the best high-yield savings accounts »
A few weeks ago, I got a notice from my bank that the interest rate on my savings account was going down. It was being decreased from 1% to .80%.
That’s not the first time my bank has decreased its rate this year. Back in May, the rate changed from 1.5% to 1.25%. Somewhere in between May and August, it changed again to 1%.
At first, I was upset, but after some quick Googling, I noticed that this was happening at banks across the board. Instead of getting mad and switching banks, I took a deep breath and realized that these fluctuations are a symptom of the COVID-19 pandemic and global recession.
But soon I saw that all my friends were complaining about this, too. So here’s what’s going on — and why this doesn’t mean you should close your account and go to a different bank.
Why interest rates on high-yield savings accounts are going down
The Federal Reserve is in charge of setting interest rates, and banks and lenders adjust their rates to match these changes. When the Fed increases rates, banks and lenders will increase rates on loans and savings accounts accordingly.
Because the Fed has cut rates this year, many high-yield savings account rates have also dropped. But rates on savings accounts can change at any time, sometimes with little warning. In fact, some banks may not even notify customers directly before changing their rates.
Why a high-yield savings account is still worth it
Even though rates on high-yield accounts are decreasing, they’re still better than traditional savings accounts. According to the FDIC, the average interest rate on a typical savings account is around .06% APY. Rates for high-yield accounts at various national online banks are still much higher, between .75% and .8%.
If you have $5,000 in a high-yield savings account with .8 % APY, you’ll earn $40.16 in interest in one year. If you keep it in a savings account with .06% APY, you’ll only earn $3 in interest.
After five years, the difference between the two savings accounts will be $189.03. That’s a huge chunk of change considering it doesn’t cost anything extra to open a high-yield savings account.
Should you switch savings accounts?
If you were notified that your savings account rate has decreased, you may be tempted to switch to a different bank. But don’t rush to close your account.
The difference between an account that pays .8% APY and one that pays .75% is $2.52 a year if you have $5,000 in the account. Is it worth taking the time to switch your accounts, move the money, change your direct deposit information, make sure your transfers are canceled — all to earn a few bucks?
How to minimize the effect of rate fluctuations
One way to minimize the effect of savings account interest rate decreases is to use a Certificate of Deposit (CD) instead of a savings account. A CD usually has comparable rates to a savings account, but the difference is that the rates are locked in place when you open the CD.
If you open a CD with a 2% interest rate, it will remain at 2% until it matures. When you open a savings account, the interest rate is subject to change at any time.
The downside to opening a CD is that the money is locked in the CD until the maturity date, which can range from six months to five years. If you want to withdraw funds from a CD before the maturity date, you may have to forfeit a portion of the interest.
That’s what makes CDs different than savings accounts. With a savings account, you can withdraw money any time without a penalty. The liquidity of a savings account is much better than a CD.
Another way to maximize your money is to open a high-yield checking account. These accounts have higher interest rates than savings accounts, but come with more requirements. You may have to switch your direct deposit to that account and make a certain number of purchases with the debit card.
Also, some high-yield checking accounts have limits on how much money will earn the highest interest rate. If you have an account with $50,000, you may only earn the highest rate on $10,000.
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