There are two mindsets when it comes to money. You can be someone who likes to borrow or you can be someone who likes to save. On March 19th, I received an email from Betterment explaining that my Cash Reserve APY is going down from 0.4% to 0.3%. I quickly checked some other high yield bank accounts and found that Discover just went from 0.5% to 0.4% APY. I expect more banks and brokerages to lower their rates soon. In this post, I will discuss why rates are going down.
The APY, or annual percentage yield, determines the amount of interest you earn on your savings in a year. The higher the percentage, the more money you earn. It is a variable rate that can go up or down depending on certain factors. About two years ago in 2019, rates were as high as 2.69%, meaning you can earn $269 over a year if you have an average savings balance of $10,000. When COVID hit, rates dropped significantly. Some Banks are offering as little as 0.01% APY on their savings account.
When the economy is doing well and the Federal Reserve raises interest rates, the banks also raise their APY. When the economy is not doing well and the Federal Reserve lowers interest rates, the banks lower their APY. Lately, the Fed has been lowering interest rates to encourage people to borrow and spend money. Their hope is that these low interest rates will stimulate the economy. This is great for borrowers, but bad for savers. A high yield savings account is important for keeping up with inflation. If inflation is higher than your APY, you are losing money by having it sit in your bank account.
As more people vaccinate against COVID and more jobs are filled, the Fed is expected to raise rates with banks to follow suit. According to the FDIC, the national average interest rate on savings accounts currently stand at 0.04% APY, which means the 0.3% APY with my Betterment Cash Reserve account is still 8 times better than the national average. My advice would be to keep your high yield savings account if you are already earning 0.1% or better. If you are earning less than 0.1%, it is worth switching to a new online savings account.
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