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Another day, another email saying my high yield savings account interest rate is dropping. When we started intern year, I remember comparing different interest rates with my friends. Wealthfront 2.35%, Ally 2.3%, Citibank 2.2%, Marcus by Goldman Sachs 1.8% etc.⠀
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Currently, if you google these same savings accounts you will see very different numbers. Wealthfront 0.35%, Ally 1.3%, Citibank 1.5%, Marcus by Goldman Sachs 1.3%.⠀
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These are all changes that have happened over the course of a year!⠀
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Why are the interest rates changing so much for these accounts?⠀
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The Federal Reserve, aka “the Fed” is the central bank of the United States. Important duties it performs include supervising and regulating banks and maintaining financial stability for the country.⠀
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Why is it important?⠀
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The chairman of the Federal Reserve holds a meeting eight times a year and discusses economic indicators concerning inflation, recession, and issues affecting economic growth (such as COVID). Often you will see a response from the stock market on these days because the chairman states whether there will be any changes to the “Fed rate” aka the rate at which banks can lend money.⠀
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Example: Given economic indicators hinting at a recession in addition to COVID, the “Fed” lowered interest rates to 0 to 0.25% to encourage small businesses to take out loans in an effort to help stimulate the economy.⠀
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So, what does it all mean and why is my interest rate going down?⠀
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Your high interest savings account rate is based off the Fed rate. This means when the Fed rate goes down (because there are signs of a recession), so will your high interest savings interest rate. This is why Wealthfront’s high yield savings rate is around 0.3%. Other high yield savings accounts have been slowly lowering their rates and may eventually become closer to the current Fed rate.⠀

So, should you change high yield savings accounts based on interest rate?

The short answer would be no, stay the course.  Although some accounts are still around 1.3% APY, if the Fed continues to have an interest rate around 0.1%, it is not sustainable for them to keep their high yield savings rates high since they would be losing money. Very likely, if the rates stay low, high yield savings accounts will continue to drop interest rates and become closer to the rates seen in a regular savings account.

Pros of changing: Slightly higher interest rate

Cons of changing: the rates at the new bank may drop, the paperwork and time involved in closing one account, filling out the forms to open another, validating your bank account, and doing the external transfer

From my perspective, really any interest rate above the standard savings account 0.09% APY is great to me. Granted, my high yield savings rate is around 1.3% and Wealthfront right now is around 0.3%. If I was with Wealthfront, I still would stay the course and if in another six months it remained the only outlier then I would consider changing.  

Ultimately the money I am putting in my high yield savings is my emergency and future vacation fund. This isn’t money I’m looking to see rapidly grow. If I wanted to invest the money it would be in my Roth IRA or 403b and hope for a good return.

What are your thoughts on switching high yield savings accounts based on interest rates?

Comment below!