Updated September 18, 2020: High-yield savings accounts are meant to grow your savings much faster than a typical savings account, but some of the most popular high-yield accounts are cutting their rates in half.
In May 2019, fintech company Wealthfront debuted its high-yield savings account with 2.57% interest rate. A year later, that number is at 0.35%. You can still find accounts with rates around 1% including Nationwide, Ally and American Express, but rates are lower everywhere.
High-yield accounts can offer higher rates because they often come from banks without physical locations, so they have lower expenses. But all interest rates follow the movements of the federal funds rate, which is the rate banks charge other banks for loans. And that rate has fallen drastically. The Fed rate at the beginning of July stands at 0.25% — a year ago it was 2.5%.
If you’re getting frustrated with lower rates, it may be time to rethink what you’re saving for. Here’s how to weigh your options and pick the right savings alternative for you.
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Consider your options
High-yield savings accounts are hovering around a 1% annual percentage yield. Hunting for the best rate won’t make a major difference, said Jean Chatsky, CEO and founder of HerMoney.
“For savers, unfortunately, there aren’t many good options these days,” Chatzky said.
While high-yield savings accounts will earn many times more interest than traditional accounts, it’s still not much, she said.
Depending on your savings goals, you may want to consider an alternative savings method:
Certificate of deposit: You can lock in a high-yield rate using a CD for a fixed amount of time. The downside is you can’t touch that money until the term is up. You may want to consider this alternative to acheive one-to-five-year goals, like buying a car or a down payment on a house. In addition, CD rates are only slightly higher than high-yield savings account rates.
529 Plan: A 529 Plan offers advantages when it comes to saving for education. Deposits and withdrawals are tax-free as long as you spend the money on education expenses like tuition, books, off-campus housing and meal plans.
Stock portfolio: Investing in stocks requires you to accept the ups and downs of market volatility, but you can combat it by diversifying your portfolio. Roger Ma, certified financial planner at Lifelaidout and author of “Work Your Money, Not Your Life.” suggests a mix of stocks, bonds and target-date retirement funds.
401(k) plan: When it comes to retirement, investing in your company's 401(k) plan will do the work for you. You can invest your contributions on a tax-deferred basis. A 401(k) can be especially lucrative if there’s a company match. If your company recently cut match rates, it’s still important to contribute. Otherwise you’re leaving money on the table.
Individual retirement account: A traditional IRA is a tax-advantaged account that can help you invest in your retirement and save you on your taxes. IRAs are an option for retirement planning without going through an employer. You can still contribute to an IRA if you’ve enrolled in a company 401(k).
Roth IRA: Your money will be taxed before contributing to a Roth IRA, but not when you make withdrawals, making it an attractive option if you’re expecting to belong to a higher tax bracket in the future. You’ll be able to invest contributions in a portfolio of stocks, bonds or mutual funds.
Annuity: If you’re worried about not saving enough for retirement, an annuity can give you an additional income stream in retirement, though it can take a while to pay out.
How to pick the right account
Low interest rates can be frustrating and there’s no indication they will rise anytime soon, said Ma. To choose where to put your savings, reevaluate what you’re saving for and when you plan to spend it.
A high-yield savings account is still a good option for short-term funds like monthly expenses or emergency savings because it’s immediately accessible, Ma said. If you’re focused on growth, putting your savings in the stock market will grow your money more aggressively, but it’s also more risky — the money may not be there in five years, Ma added.
For long-term goals like buying a house, college funds or retirement, you may want to look for tailored alternatives. Ask yourself how flexible your goals are, said Ma. Do you need to make a down payment on a home in five years or can you be more flexible? Depending on your time frame, you may want to lock in a one- to five-year CD.
With interest rates low, your own behavior becomes a much bigger factor in how much you save. If you put money away regularly and don’t touch it, you’ll build up a healthy nest egg. The longer that money sits, the more you’ll gain.
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