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What Lower Interest Rates Mean for Your Savings Account

Posted On August 12, 2020

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Historically low interest rates are great news for borrowers and not the greatest news for savers.  While the cost of borrowing money is at an all-time low, savers are earning less interest on their savings accounts.  Even traditionally higher-interest savings accounts at digital banks are earning less interest than they did just two years ago and are expected to continue on that trend as long as the Federal Open Market Committee (FOMC) keeps rates low.  If you’re trying to maximize the return on your savings in a low interest rate environment, here’s what you need to know.

Online Banks Still Have Higher Annual Percentage Yield

Online-only banks are able to offer a higher annual percentage yield (APY) than traditional brick and mortar banks because they do not have the operational costs of renting offices, hiring tellers, and maintaining branches.  These banks sometimes offer an APY of ten to twenty times what a traditional bank offers.  However, online-only banks are not immune to a low interest rate environment.  Still, despite the recent drop in rates, saving with an online-only bank will yield a higher return than a traditional savings account, just a less significant one that it will in a rising interest rate environment.  Online-only banks also typically do not require the higher minimum balance of a money market account and you can still withdraw funds as needed with the same restrictions of a traditional savings account. 

Consider Longer-Term Savings Options

If you will not need access to your savings, you may want to consider a longer-term savings option like a certificate of deposit (CD) or money market account.  CDs tend to have the highest yields compared to other savings accounts, but you will not be able to withdraw funds until the term expires.  Keep in mind, a new CD will also reflect today’s low interest rates.  With a money market account, you’ll earn a higher yield than a traditional savings account and be able to withdraw funds with the same restrictions, but you will have a higher minimum balance.    

Wait it Out

Switching your savings account now will not immediately help you earn a higher APY, and even when the FOMC raises the federal funds rate, any increase in the savings rate will be gradual.  Additionally, if you choose to invest in a CD now, you’ll be stuck with a lower rate for the term of your CD.  Even though online-only banks average APY has dropped, it is still higher than the most traditional banks. 

A low interest rate environment means it’s cheaper to borrow money, like a mortgage, but it also means that savers are earning less interest on their savings account.  As economic recovery continues, the FOMC expects to keep rates low through 2021 to lower the cost of borrowing and stimulate recovery.  If you have any questions about reaching your savings goal, talk with a financial professional like a financial advisor. 

 

Sources: The Balance, Money.com, NerdWallet