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High-yield savings accounts are known for their better-than-average interest rates, which can help your money work harder and grow faster. But what should you do if rates on high-yield savings accounts start to decrease? Watching your yield go down might feel unsettling, but rate changes come with the territory. Consider taking these three steps before making any big moves.
Why Interest Rates Matter for High-Yield Savings Accounts
Rates on high-yield savings accounts are closely tied to the federal funds rate, which is a benchmark rate set by the Federal Reserve. The federal funds rate is how much banks are paying to borrow money from each other.
When you hear about the Fed raising or cutting rates, it's important to understand that the central bank does not directly change interest rates on savings accounts, certificates of deposit (CDs) or other savings products. Financial institutions ultimately decide what yields they'll offer—but their rates usually move in the same direction as the federal funds rate.
When this rate goes down, annual percentage yields (APYs) on high-yield savings accounts and CDs generally do the same. Interest rates on loans and mortgages also tend to drop. The opposite occurs when rates increase.
What's Going on With Interest Rates Now?
The federal funds rate dropped significantly during the COVID-19 pandemic, and rates on high-yield savings accounts and CDs followed suit. The Federal Reserve went on to increase its benchmark rate 11 times over the next three years. That bumped up the cost of borrowing, but also allowed consumers to secure better rates on savings accounts.
From August 2023 to mid-September 2024, the federal funds rate was 5.33%—but the Federal Reserve cut that rate by half a percentage point on September 18. Only time will tell if more rate cuts are on the horizon. In the meantime, there will likely be a slight drop in high-yield savings account yields. This begs one obvious question: What should you do about it? Here are some options.
Find High-Yield Savings Accounts
1. Don't Rush to Take Money Out
You don't necessarily have to do anything. Interest rates on high-yield savings accounts are variable—not fixed. That means they're going to fluctuate over time. Even if rates on high-yield savings accounts fall, your money will still earn more interest than it would in a traditional savings account. As of September 2024, the average rate on a traditional savings account is just 0.46%, according to the Federal Deposit Insurance Corp. (FDIC). Meanwhile, some high-yield savings account rates are over 5%.
Your money is also safe in a high-yield savings account. Virtually all banks are FDIC-insured for up to $250,000 per depositor, institution and account category. Credit unions provide similar protections. Having said that, you can always shop around for a better rate since APYs can vary from one financial institution to the next. Unlike CDs, which typically charge early withdrawal penalties, high-yield savings accounts make it much easier to move money.
Learn more >> Reasons to Put Your Money in a High-Yield Savings Account
2. Reassess Your Liquidity Needs
Think about your savings goals and when you plan on needing your money. For example, if you're using a high-yield savings account to hold your emergency fund, accessibility is important—you don't want any delays if you need cash now. Similarly, you might have plans to withdraw funds for an upcoming vacation.
But you may have more flexibility with savings goals that aren't as time-sensitive. That might include money you're setting aside for home renovations or a down payment on a house. You may get a better interest rate if you move that money into a CD, which is another low-risk investment option. Shopping around and comparing rates can help you decide what's best for you.
3. Consider Different Savings Vehicles
If your rate starts to drop, you might consider other ways to grow your money. Just keep in mind that high-yield savings accounts offer a combination of safety, liquidity and returns that may be hard to match elsewhere, particularly for short-term needs.
We already mentioned CDs, which require you to keep your money in the account for a predetermined amount of time. When that period ends, you'll get back the money you put in, plus interest. You can also consider the following investments:
- Treasury securities: Treasury bills, notes and bonds are considered very safe because they're backed by the U.S. government. Some are short-term investments, while others take decades to mature.
- Bonds: When you purchase a bond, you're providing a loan to whoever issued it. That might be a corporation or government entity. As of August 2024, the average yield for the highest-rated corporate bonds by Moody's was 4.87%.
- Mutual funds and exchange-traded funds (ETFs): Investing in the stock market carries more risk, but stocks may be positioned to do well after a rate cut. According to investment research firm Morningstar, lower rates are meant to stimulate the economy and reduce borrowing costs for consumers and businesses. That could have a ripple effect that increases stock prices. Returns are never guaranteed—and it definitely isn't wise to invest your emergency fund—but you might consider putting a portion of your money into ETFs or mutual funds. These are generally seen as less volatile than individual stocks and the potentially increased returns could mean your money will grow more quickly.
Learn more >> Best Low-Risk Investments
The Bottom Line
If you've got money in a high-yield savings account, you obviously want the best rate you can get, but yields can fluctuate as the federal funds rate changes. Staying focused on your savings goals and liquidity needs can help you respond accordingly. That might mean doing nothing, or moving some or all of your money into a new high-yield savings account or other investment vehicle. The right move for you will depend on your financial situation and goals.