Experts: Should You Keep a High-Yield Savings Account When the Rate Drops?
If your money is parked in a traditional savings account in the U.S., you’re likely only earning around 0.46% in interest on these dollars, which isn’t even enough to keep up with inflation when it’s on the lower side.
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Many high-yield savings accounts (HYSA) are capitalizing on higher interest rates by offering annual percentage yields (APY) ranging from 4% to over 5%, which can translate to extremely good earnings.
However, what happens when these HYSAs drop their generous rates? Is it still worth investing in these accounts or should you do something else with your money while still keeping it liquid? Experts explain.
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Always Maximize Returns
“[I]ndividuals should always be in the mindset of trying to maximize returns-even on cash,” according to Ted Parchman, a chartered financial analyst and senior portfolio manager and shareholder at Truepoint Wealth Counsel.
“High-yield savings will typically always have a yield edge to checking and savings accounts at traditional banks,” he said.
Additionally, he said that separating the high-yield account from your normal checking account allows you to more easily switch HYSA providers if another has a higher yield without having to disrupt your recurring payments.
“Today, I personally prefer to use a low-cost money market fund at my custodian,” Parchman said. “This allows me to capture higher rates more quickly than banks when the Fed increases rates without having to shop around. This has worked out well for me as rates have risen and I have one less account to worry about/track.”
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If Rates Fall
If rates start to fall, HYSA and money market funds will quickly start paying out less.
However, Parchman said, “Given the significant gap between what these products are paying versus a traditional bank account, rates will have to fall significantly before it doesn’t make sense to allocate much of your liquid savings to one.”
In fact, he said, there really isn’t an APY level where high-yield savings doesn’t make sense since it will still be more than a regular savings account.
However, he added, “Savers will be better off investing cash in excess of short-term needs/rainy day fund in stocks and bonds for the long-term to maximize absolute returns.”
When Does the Value of an APY Level Off?
The APY is a critical factor in determining the potential growth of your savings in an HYSA, according to Francesca Torre, founder of Cent of a Woman, a company that promotes financial literacy for women.
“It represents the real rate of return, taking into account the effect of compounding interest over the year. As interest rates fluctuate based on economic conditions, it’s vital to understand that there can be a threshold at which the APY on an HYSA might not be as advantageous,” she said.
This threshold varies, influenced by factors such as inflation rates, alternative investment opportunities and personal financial goals.
“When the APY offered by HYSAs is comparable to or less than the inflation rate, the real value of your savings may not grow significantly. In such scenarios, it might be worth exploring other savings or investment vehicles,” she said.
Choosing the Right HYSA
With many financial institutions offering HYSAs, selecting the right one requires several considerations, Torres said.
Interest rates obviously can vary widely between banks. So, while on the one hand it’s important to look for the most competitive rates to maximize your earnings, make sure there are not high fees, and that it has good mobile banking options and access, Torres said.
“High fees can negate the benefits of higher interest rates.”
Alternatives for Liquid Savings
Here are some other options beyond HYSAs.
Money Market Accounts
Money market accounts often provide slightly higher interest rates than HYSAs, as well, with similar levels of liquidity, albeit sometimes requiring higher minimum balances, Torres said. These might be a good alternative.
CDs and Short-Term Treasuries
Other ways to diversify your options but keep a higher yield, Parchmans said, are CDs and short-term treasuries. However, note that while these provide higher yields they come with less liquidity than HYSAs and money market accounts.
“We have been buying treasuries for a number of clients in the past year or two given how high rates have become. The benefit of buying a CD or treasury is that you are able to lock in a rate for a given period of time,” he said.
Short-term bond funds/ETFs are another option that could improve your yield, he said, but their price is not fixed.
“So if rates actually go up instead of down, you could be faced with a price decline/loss realized if you have to sell some of that fund/ETF to generate cash.”
If You Need Access Quickly
If you may need access to your funds, Chris Urban, CFP, founder at Discovery Wealth Planning, has a strong preference for the HYSA account versus CDs, though he said there are some “no-penalty CDs” that may give you greater access to your funds if you need it.
“It depends on the size of the investment you’re making but generally I am comfortable with the variable interest rate offered on savings accounts with immediate access to cash if needed versus the (potential) lockup of funds in a CD.”
Don’t Put All Your Money Into One Account
No matter the greater yield, be careful not to put more than a “reasonable amount” in a HYSA, Urban said.
For those who are still working and earning a stable income, thus less likely to need to pull from these funds, he recommended only keeping something closer to three to six months’ worth of living expenses in one.
“However, if you are a retiree with limited to no income, in my opinion you definitely want to have at least one to two years worth of living expenses in these kinds of accounts, primarily to protect you from having to draw from retirement/investment accounts should they decrease significantly in value.”
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This article originally appeared on GOBankingRates.com: Experts: Should You Keep a High-Yield Savings Account When the Rate Drops?
