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Understanding High-Yield Savings Accounts
Interest rates on high-yield savings accounts are variable and can change at any time. Typically, rates adjust after a Federal Reserve committee meeting. The account’s annual percentage yield (APY) determines your yearly interest earnings. A higher APY means faster growth for your savings.
However, APY can fluctuate. If you opened a high-yield account when rates were high and now see a drop, you might wonder if a high-yield savings account is still right for you.
What Is a High-Yield Savings Account?
A high-yield savings account is an interest-earning account that usually offers a much higher APY than a traditional savings account. For instance, in late February 2023, the national average APY on standard savings accounts was just 0.35%, according to the Federal Deposit Insurance Corporation (FDIC). However, many banks now offer annual returns well above 3% on high-yield savings accounts.
High-yield accounts can help you build your savings to reach financial goals, such as making a down payment on a house, buying a car, or covering other significant expenses. They are also 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.
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. When you open your savings account at one rate, it likely won’t stay at that rate forever. This variability can make it hard to predict your annual interest earnings.
Variable savings rates are linked to the federal funds rate set by the Federal Open Market Committee (FOMC). 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. Conversely, if the FOMC cuts the federal funds rate, 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. Here are some 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. Financial experts recommend having three to six months’ worth of your basic expenses in savings.
- 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.
- Consider laddering certificates of deposit (CDs): CD laddering involves buying multiple CDs with different terms that mature on a staggered basis. This strategy can be useful when savings rates get too low for your liking.
- Try investing: Investing in stocks, bonds, or other assets might be an alternative if rates drop substantially on your savings account. However, this option carries more risk and 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.
For any mortgage service needs, call O1ne Mortgage at 213-732-3074. We’re here to help you achieve your financial goals with the best mortgage solutions available.
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