You’ve probably been discouraged to see the interest rate on your high-yield savings account fall during the past couple of months. But your money is still earning much more than it would in a traditional savings account — and more than inflation.
Rates paid on cash in savings accounts have been dropping since the Federal Reserve began cutting its key interest rate in September as inflation cooled. The central bank cut rates again, by a quarter point, at its meeting this month, and another cut in December is seen as likely, though not certain because of a recent uptick in inflation.
Banks are following the Fed’s lead in gradually reducing interest rates. Even so, the rates paid on federally insured high-yield savings accounts, many offered by banks that operate solely or mostly online, are still beating inflation, which was 2.6 percent on an annual basis in October.
“High-yield savings accounts are still attractive relative to traditional savings accounts,” particularly for emergency or “rainy day” funds that savers want to be able to tap into quickly, said Alan Bazaar, chief executive and co-chief investment officer at Hollow Brook Wealth Management in Katonah, N.Y.
Online banks were offering rates of 4 percent or higher this week, compared with a national average rate of just 0.56 percent for all types of savings accounts, according to the financial site Bankrate. If you put $5,000 in a savings account for a year at the average rate, you’d earn just $28, compared with about $200 with a high-yield account. (At some of the biggest national banks, which are offering just 0.01 percent, you’d end up with a measly 50 cents.)
Just a few years ago, savers were getting 1 percent on their deposits at best, so 4 percent is nothing to scoff at, said Ted Rossman, a senior industry analyst at Bankrate. High-yield accounts can also be attractive for funds needed in the not-so-distant future — say, for a child heading to college or for retirees looking to set aside cash for living expenses.
The accounts can generally be set up quickly online and funded by electronically depositing funds from your checking account. Withdrawals can typically be transferred out within one or two business days. Mr. Rossman advised pairing an online high-yield savings account with a traditional checking account at a brick-and-mortar bank so you can visit a branch if needed.
A few banks and credit unions continue to offer rates of 5 percent or higher on savings accounts — but generally they are less familiar institutions or have special requirements, like making a large initial deposit or minimum monthly deposits. LendingClub Bank offers 5 percent but may pay a reduced rate unless you deposit at least $250 a month. Pibank, an online brand of Miami-based Intercredit Bank, is advertising 5.5 percent nationally. Openbank, the new digital arm of Santander Bank, is advertising 5 percent with a minimum deposit of $500. (The rate isn’t available, however, in many states in the Northeast.)
Savers shouldn’t be put off simply because a bank isn’t a household name, as long as their money is insured by the Federal Deposit Insurance Corporation, Mr. Rossman said. Look for the logo on the bank’s website or check the agency’s BankFind tool. (Deposits are generally protected against a bank failure for up to $250,000 per depositor per bank. To check your coverage, use the F.D.I.C.’s calculator.)
It’s true that more Fed rate cuts are anticipated, Mr. Rossman said, but the pace is expected to slow. Even as rates fall, banks are operating in a competitive environment, and some may still offer higher rates to attract customers. Openbank’s rates will change, “but we expect to remain very competitive,” said Swati Bhatia, head of retail banking and transformation at Santander.
Despite the availability of higher rates, many people stick with low-interest accounts, perhaps because they don’t realize what they are missing, according to a recent survey of American adults from Openbank. The survey found that 40 percent of those with only a traditional savings account didn’t know what interest rate their account paid. Plus, more than half of those with traditional accounts said they thought they would have to leave their main bank to open a high-yield account at another bank. (The online survey of 2,206 adults was conducted for Santander by Morning Consult.)
Here are some questions and answers about saving options:
What other options are available for federally insured savings accounts?
Savers can consider certificates of deposit, or C.D.s, which tend to offer higher rates than savings accounts but typically charge a penalty if you withdraw your funds before the term of the certificate is up. Penalties are typically a couple of months of interest, but can be more for longer-term certificates. C.D.s commonly come in terms of three months to five years.
Even brick-and-mortar banks are offering rates at 4 percent or higher for C.D.s, depending on the term. In some cases, banks may require larger minimum deposits to get those rates.
To avoid locking up your cash, Mr. Bazaar said, you might consider “no-penalty” C.D.s, which pay a lower rate but don’t reduce your interest if you withdraw funds early.
What is a C.D. ladder?
You can lock in current rates but have periodic access to your money by opening C.D.s with different terms. If you have $15,000, for instance, you might open three $5,000 C.D.s at terms of six months, nine months and 12 months. When the six-month certificate matures, you roll the money into a new 12-month C.D., and so on.
What other low-risk options are available for my cash?
Money market funds, which you can open through a brokerage, invest in low-risk securities, like Treasury bonds, and are considered relatively safe investments. But they are not F.D.I.C. insured, and it’s possible — although rare — to lose money on them. (They are different from the similarly named money market accounts, which are bank deposit accounts that also offer checking account features and typically are federally insured.)
Yields on money market funds have also been declining, but a group of large funds tracked by Crane Data still averaged 4.46 percent as of Thursday.
Getting higher yields than those offered by money market funds means taking on more risk, Mr. Bazaar said. Options that are riskier than money market funds, but less risky than investments like stocks, include “short-duration” mutual funds, which typically invest in corporate bonds that mature in one year or less, Mr. Bazaar said. Currently, he said, yields of around 7 percent are available.
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