Keeping your cash in a high-yield savings account is an easy way to maximize your savings through compound interest. If you don’t already have one, it’s worth considering before the upcoming Federal Reserve policy-setting meeting this week.
Right now, rates on high-yield savings accounts are particularly high — over 5%. But they won’t remain this high for long.
Back in March 2022, when the Federal Reserve began its rate-hiking campaign in an attempt to reduce high inflation, savings rates began to rise in tandem with interest rates. From 2022 to 2023, the Fed raised rates 11 times, making borrowing significantly more expensive, but also making rates on savings accounts much more attractive.
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However, once the Fed’s rate-hiking campaign came to an end, so did the boon to rates on high-yield savings accounts and CD accounts. When the Fed began holding interest rates steady, which it has now done for eight consecutive meetings, savings rates began to drop.
The Fed is now expected to begin cutting interest rates by 0.25% at its upcoming meeting, which begins September 17. When this happens, savings rates will drop even more.
But this doesn’t mean opening a high-yield savings account isn’t worth it anymore. APYs on high-yield savings accounts, even after this initial rate cut, will still trump those of standard savings or checking accounts.
Why it’s worth getting a high-yield savings account before the next Fed meeting
While opening a high-yield savings account before the next Fed meeting won’t lock in current rates, as the APY on these accounts fluctuates with the market, it’s still worth it to open one.
Yes, rates will fall even more when the Fed begins cutting interest rates, but they’ll still remain far higher than those of a normal checking or savings account. So even when rates eventually drop — which they'll do gradually over time as the federal funds rate is lowered over time — you’ll still miss out on potential earnings by not saving your cash in one of these accounts.
If your high-yield savings account has an APY of 4.50%, after the Fed makes its first rate cut, you can expect it to drop to 4%, according to the Motley Fool. While that's lower than now, it is still a great rate, considering the national average savings account is only 0.61%, according to Bankrate.
If you were to save $10,000 in an account with a 4% APY, you’d earn $400 in interest after just one year of savings, with no effort on your part. With an APY of 0.61%? You'd earn just $61 in interest. That’s a $339 difference, and all you have to do is take five minutes to open a high-yield account, which is super simple. And remember, with the power of compounding, the earlier you start investing, the better your returns will be.
You’ll open it the same way you’d open a traditional account, except you may have to forgo your brick-and-mortar bank for an online bank or credit union, as these are where high-yield accounts with the best rates are typically offered.
Compare rates on high-yield accounts by using our tool below, just keep in mind you won’t be able to lock in the rates shown. If you're interested in locking in rates before the Fed meeting later this month, a CD account might be the right option.
When to consider a CD account
Unlike high-yield savings accounts, CD accounts offer a fixed APY. This means that if rates go down (which they will) after you've opened a CD, your earnings won't be affected.
While opening a CD account can be a smart way to take advantage of high rates for as long as possible, there's one caveat: You'll need to make sure you don't make any withdrawals before the CD matures. Doing so will result in fees that can offset any interest earned (unless you have a no-penalty CD account).
You can compare CD rates by using our tool below. Before opening one, however, make sure you choose a maturity date that makes sense for you financially.
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