What Happened to Your High-Yield Savings Account?
It’s never pleasant to get a notification from your bank informing you that the interest rate on your high-yield savings account is decreasing. But, it is becoming more common. According to the FDIC, the national average interest rate on a traditional savings account is 0.45%, with many brick-and-mortar banks offering lower rates than that. In recent years, high-yield savings accounts (HYSAs) have been a popular choice for those looking to earn more interest on their savings, with interest rates offered by HYSAs topping out over 5% APY (annual percentage yield). Investopedia offers a list of the best high-yield savings accounts available.
High-Yield Savings Accounts and Rising Interest Rates
In January of 2022, the highest APY available was 0.70%. In March of 2022, the Federal Reserve began a rate-hiking campaign that lasted through July of 2023 with 11 rate hikes, for a cumulative increase of 5.25%. These rate hikes led to very appealing interest rates on HYSAs, with many happy to collect a robust yield on their savings.
The problem is that interest rates on high-yield savings accounts are variable and can change anytime — a bank may advertise a certain APY when you apply, but it likely won’t last forever. With the Federal Reserve’s rate cut of 50 basis points in September, followed by a 25 basis point cut in November, many are seeing the interest rates on their HYSAs coming down steadily.
Should You Consider Other Investment Options?
While High Yield Savings Accounts remain a prudent option for emergency savings, now may be a good time to consider other investment options that offer the potential for higher returns over the long term.
1. Ultra Short-Term Bonds
Ultra short-term bonds are bond funds that invest only in fixed-income instruments with very short-term maturities of less than one year. Because of their focus on bonds with very short durations, these portfolios offer minimal interest-rate sensitivity and therefore lower risk and total return potential. This allows investors to capture the higher yield while the fund also appreciates in value as rates come down. Learn more about ultra short-term bond funds from FINRA.
2. Dividend-Paying Stocks
Dividend-paying stocks are another option. Many large, established companies share a portion of their profits with shareholders, providing a steady income stream. Stocks with strong dividend yields have historically offered stable growth, making them a potentially lucrative option over time. For more details, see Morningstar’s guide to dividend investing.
The Downside of HYSAs in a Low-Interest-Rate Environment
As the interest rates coming down, HYSAs may not be able to keep pace with inflation, which means the cash in those accounts will lose purchasing power. By contrast, other investments have been much better places to park capital. Moreover, for investors willing to take more risk, the reward has generally been worth it.
Final Thoughts: What’s Next for Your High-Yield Savings?
High Yield Savings Accounts are a great place for short-term needs and emergency savings, but as the interest rates come down, investors should consider putting additional cash to work by investing it. We welcome a conversation if you are seeing your HYSA interest rates coming down and need some help figuring out what to do next!
What I am I doing with my High Yield Savings Account? Thank you so much for asking – I bought a horse. While he is not exactly a good investment, he is a great investment in my happiness!
