Image source: The Motley Fool/Upsplash
I’m a big fan of saving money and have been building my savings for several years. I keep my extra cash in a high-yield savings account to earn interest while my money sits in the bank. This type of savings account is ideal for people who want to get rewarded for savings.
But there’s one downside to high-yield savings accounts that you should know. I’ll explain more so you can better decide where to keep your extra cash.
How high-yield savings accounts work
Keeping your savings in a bank account that earns interest is wise. A high-yield savings account pays interest, and the rates are typically higher than traditional savings accounts. Opening a high-yield savings account is a smart strategy to earn more while you continue to save money. The longer you keep your extra cash in the bank, the more interest you can earn.
Your rates may change
Many of the best high-yield savings accounts now offer rates of 5.00% or more. If you have a sizable emergency fund or other savings, you could earn a solid amount from interest. But, while rates are high now, that may not be the case in a few months or next year.
Banks can alter interest rates at any time. If savings account rates are lowered, you’ll earn less interest. This is something to consider if you’re working hard to reach your savings goals and want to maximize the interest you earn.
How interest rate changes impact consumers
Interest rate changes impact consumers. The Federal Reserve interest rate (or federal funds rate) is the rate at which banks and credit unions borrow money from each other. The Federal Reserve makes decisions regarding the federal funds rate.
Between March 2022 and July 2023, the Federal Reserve increased rates 11 times, hoping to cool inflation. Many banks adjust their rates when the Federal Reserve rate is reduced or increased, which impacts consumers’ wallets.
Higher interest rates on loans, like mortgages, result in consumers paying higher interest fees when they borrow money. However, consumers with savings accounts can benefit. If banks increase their interest rates after Federal Reserve rate hikes, consumers with high-yield savings accounts can earn more interest on their savings, which can help their personal finances.
Here’s how to lock in interest rates on your savings
You can explore other banking products to avoid fluctuating interest rates. A certificate of deposit, or CD, is another bank account option. CDs typically offer higher rates than high-yield savings accounts, and the rate is guaranteed for a set amount of time.
This product can be an excellent solution for savers who worry about fluctuating rates. However, with this type of account, you must keep your money in the bank for a set time. Terms vary but can be as short as just a few months or as long as five years or more. If you withdraw your money before the end of the CD term, you risk an early withdrawal penalty.
Penalty fees can be expensive and usually amount to a certain number of months’ interest. You can avoid withdrawal penalties by opening a no-penalty CD. However, these CDs typically offer lower rates. CDs are ideal for savers who don’t plan to use their savings soon.
If you need to access your money within the next few months, avoid stashing it in a CD. But if you don’t have plans to use your savings soon, a CD may be worth exploring. Check out the best CD rates to learn more.
Savers should monitor rates
If you have a savings account, keep an eye on the interest rate. If you’re not paying attention, you may miss rate changes. A rate change could impact how much you earn. But remember, any money earned is better than nothing. So, even if rates decrease, keeping your cash in a savings account is better than having it in your checking account and earning no interest.
These savings accounts are FDIC insured and could earn you 11x your bank
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. Our picks of the best online savings accounts could earn you 11x the national average savings account rate. Click here to uncover the best-in-class accounts that landed a spot on our short list of the best savings accounts for 2024.
We’re firm believers in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved, or endorsed by included advertisers.
The Ascent does not cover all offers on the market. Editorial content from The Ascent is separate from The Motley Fool editorial content and is created by a different analyst team.The Motley Fool has a disclosure policy.
