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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, these rates adjust after a Federal Reserve committee meeting to modify the federal funds rate. The account’s annual percentage yield (APY) determines your yearly interest earnings. A higher APY means faster growth for your savings.

What Is a High-Yield Savings Account?

A high-yield savings account is an interest-earning account that offers a significantly higher APY compared to traditional savings accounts. As of 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.

These accounts can help you achieve financial goals such as making a down payment on a house, buying a car, or covering other significant expenses. They are also ideal for building an emergency fund or any other short-term savings that you don’t want to lock into a certificate of deposit (CD) or an investment account.

How Often Do High-Yield Savings Rates Change?

Rates on high-yield savings accounts are variable and can change at any time, often without notice. When you open a savings account at one rate, it likely won’t stay at that rate forever. This variability can make it challenging to predict your annual interest earnings.

Variable savings rates are linked to the federal funds rate set by the Federal Open Market Committee (FOMC), which sets monetary policy for the Federal Reserve. Banks tend to offer higher interest rates on their high-yield savings accounts when the federal funds rate is higher. Conversely, if the FOMC cuts the federal funds rate, banks typically offer lower deposit rates.

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 are too low for your liking.
• Try investing: Investing in stocks, bonds, or other assets can be an alternative if savings rates drop substantially. However, this option carries more risk and is not ideal if you can’t afford to lose the money you invest.

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 traditional savings accounts, helping to shift your savings into high gear.

For any mortgage-related needs, feel free to call O1ne Mortgage at 213-732-3074. Our team is here to assist you with confidence and expertise.

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