Buzz
The phrase “What goes up must come down” doesn’t just refer to gravity—it also applies to the U.S. economy. Unfortunately, the days of bull markets and endless growth can’t last forever. If you were one of those who enjoyed watching high-yield savings account interest rates hover above the 2% mark just months ago, it’s time to adjust your expectations.
Notice I didn’t advise you to “panic and withdraw all your funds immediately.”
For years, especially during and after the recession, we shared an understanding that savings interest rates were dismal. But in recent years, as the Federal Reserve implemented nine consecutive rate hikes, banks began rewarding customers with increasingly higher rates on high-yield savings accounts. By June, the average APY for online banks (those typically offering the most competitive interest rates) stood at 1.69%.
However, the chart above stops tracking just before the Federal Reserve began reversing those interest rate hikes. In July, it cut rates for the first time since 2008. As a result, high-yield savings account holders are beginning to notice notifications of falling interest rates.
What to Do if Your High-Yield Interest Rate Is Dropping
Just as it’s not worth switching banks for a tiny increase in interest rates, it’s also not worth jumping banks to avoid a small decrease. That new bank could change its rates at any point, leaving you stuck with another disappointing rate.
Yes, I watched with satisfaction as my online savings APY climbed from 1.8% to 2%, then to 2.3%. But now, I’ve seen it drop to 2.1% and then 1.9%. My savings habits haven’t changed, though. I still have the same automatic transfers set up. The money I’ve already saved hasn’t lost value—it’s simply gaining value more slowly. Since I’m not expecting to become a millionaire off a 1.9% interest rate, I’m comfortable riding out these fluctuations.
If you’re not keen on just waiting around, you do have a few options available to you.
One option is to move some of your funds into a CD. Since CDs come with a fixed term, you’ll earn the same interest rate throughout the duration (whether that’s six months, a year, or any other term you choose). The longer the term, the higher the interest rate tends to be. However, you can’t add to a CD once it’s been funded, and withdrawing early can result in a steep penalty fee. The exception is the no-penalty CD, which usually offers a slightly lower APY but lets you access your full balance without penalty if needed.
Another possibility is to invest more of your funds. Despite all the concerns surrounding the economy, the stock market remains in relatively strong condition. You could increase contributions to your tax-advantaged retirement account or add more to a non-retirement brokerage account. Though riskier, this route offers greater potential for long-term gains.
But if, like me, your high-yield savings account serves as your emergency fund, traditional CDs and investments may not be the best solution when you need quick access to cash.
For funds that you need to access quickly, it’s likely best to leave them in that high-yield savings account, even if the interest rate has dipped below 2%.
