Cash News
Following the Federal Reserve’s recent rate cuts, interest rates have been on the decline. And many savers have been disappointed to find that their savings accounts aren’t earning as much as they used to.
Right now, the national average rate for a traditional savings account is 0.43%, according to the FDIC. However, it’s still possible to find high-yield savings accounts (HYSAs) that offer more than 4% APY.
That said, as the Fed continues to cut rates, you should expect savings account interest rates to keep falling. So should you move your money somewhere else to earn more interest? That’s what one Reddit user wants to know.
One user by the name of CouplePurple8617 posed the following question:
The resulting thread is a mixed bag of advice — with some good nuggets of wisdom.
User nkyguy1988 noted that high-yield savings accounts are not investments, and are instead meant to store liquid cash for emergency funds or short-term planning. “The only thing that matters is that your HYSA is paying a rate competitive to other HYSA. It doesn’t matter if the market goes back to near zero,” they wrote. “The use case of emergency savings does not change keeping liquid cash, liquid.”
User Miserable-Result6702 added that if the original poster’s goal is long-term wealth, that money should be invested in the market and not in a savings account.
Others recommended alternatives, such as money market funds, Treasury bills, and bonds.
So what is the best course of action in a falling rate environment?
Read more: How to maximize your interest earnings following a Fed rate cut
First, just because high-yield savings account rates have fallen from their peak doesn’t necessarily mean it’s time to jump ship. For one, many financial institutions are still paying rates well above the national average.
Not to mention, HYSAs offer FDIC insurance on your balance, as well as the ability to access funds as needed. That’s not the case with many other investments.
Many people use their high-yield savings account to store emergency funds or savings for a near-term financial goal. Having easy access to that money without penalty is a huge benefit that you probably don’t want to give up for the sake of earning a bit more interest.
That said, an HYSA isn’t your only option for earning competitive interest on your savings.
Read more: 10 best high-yield savings accounts available today
For example, if you’re not planning to withdraw your money in the next several months to years, you could consider putting your savings into a certificate of deposit (CD). Right now, the average interest rate for a CD sits between 0.23% for a 1-month CD and up to 1.84% for a 12-month CD — significantly higher than the national average for a savings account. Moreover, many banks offer CD rates well above these averages (here’s our list of the best CD rates today).
Read more: Best CD rates on the market
Aside from higher interest rates, another perk of CDs is that the rate remains fixed for the entire term. So if you lock in a good rate, you keep earning the same amount for the full term even if interest rates are falling.
The drawback of a CD is that your funds are tied up until your CD reaches maturity; making an early withdrawal results in a penalty that can wipe out some or all of your interest earnings.
Another option to consider is a Treasury bill, which is a short-term debt security issued by the U.S. government. You can purchase a T-bill with a term of four, eight, 13, 17, 26, or 52 weeks. Currently, T-bills are paying as much as 4.34%, depending on the maturity date.
Read more: CDs vs. Treasury bills: Maximizing your savings
Finally, a few redditors suggested that the original poster consider a money market account. These accounts are similar to HYSAs, but often come with some checking account-like features such as checks and debit cards. They also typically require a higher minimum balance in order to earn the highest interest rate and/or avoid fees. Money market rates are on par with HYSA rates, if not slightly higher.
Regardless of which option you choose, it’s important to understand that as the Federal Reserve continues to cut its target rate, interest rates across the board will continue to fall as well. Although it’s a good idea to earn as much on your savings balance as possible, keeping your expectations in line with market conditions and ensuring you choose an account that fits your financial needs and goals is crucial.
There are many factors that go into choosing a bank account or investment, including fees, minimum balance requirements, liquidity, risk, and more. Moving money for the sake of earning a slightly higher rate could end up being more trouble than it’s worth.
Read more: Is ‘rate chasing’ worth it?
In general, if your primary goal is to maintain liquid savings while earning a competitive interest rate, a high-yield savings account is one of the best options out there, regardless of how interest rates are trending. But if you’re aiming to grow your wealth or save for a far-off goal like retirement, you may want to speak to a financial advisor about investing for the long-term.