Interest rates are falling – should you withdraw money from your HYSA?

Image source: Getty Images

Earlier this month, the Federal Reserve cut its key interest rate by half a percentage point. Because the interest rates offered by high-yield savings accounts (HYSAs) are influenced by the Fed’s key interest rate, there’s a good chance your HYSA’s interest rate will also decrease.

In fact, you may have already noticed a lower APY on your account. But does this mean it’s time to move your savings from your HYSA to a more lucrative account? Before you start transferring money, you should consider the following.

Does your HYSA offer a competitive rate?

Not all HYSAs offer the same interest rate. Compare your current interest rates with other banks’ interest rates. You may be able to earn a little more by switching to another bank or credit union. Some banks offer sign-up bonuses that can help pad your savings even further.

Looking for a new HYSA to maximize your savings and earn a top APY? Click here to view our curated list of high-yield savings accountsselected by our experts.

What is your HYSA fund for?

HYSAs earn more interest than traditional savings accounts, but they are still relatively low compared to other investment options like stocks. If the money in your HYSA is for your emergency fund or for a purchase you plan to make in the near future (one to three years), then keep it in the HYSA.

High-yield savings accounts held at FDIC-insured banks are not affected by stock market fluctuations. FDIC insurance also reimburses depositors up to $250,000 per bank per account holder category, even if the bank fails. Basically, as long as your HYSA account balance is $250,000 or less, it is completely safe.

If the money in your high-yield savings account is intended for a distant future, such as retirement or sending your children to a good college, consider moving it to a brokerage account where you invest in funds can track the S&P 500, which has historically achieved average returns of around 10% per year.

Calculate how much less you will earn

The Fed’s decision to cut interest rates by half a percentage point is a big change. The Fed tends to move the benchmark in smaller steps so it can assess what impact it is having on the economy before making larger moves.

But half a percentage point isn’t really much in the context of your savings account’s APR. Say you keep your $20,000 emergency fund in a HYSA and earned 4.50% APY last month, which is $73.50 per month. If your bank lowers your interest rate in line with the Fed (half a percent), you now earn 4.00% APR. That means you’ll only make $65.47 this month, a drop of $8.03 per month – which isn’t that big of a change.

A lower interest rate will Reduce your income over time, but it’s worth considering how big the impact this change will actually have on your savings.

Remember: slow and steady wins the race

The decline in HYSA interest rates is somewhat disappointing. The reality is that we wouldn’t earn these great prizes forever. When interest rates drop, it may be time to consider other options for your money, such as: B. Stocks or mutual funds that earn a higher interest rate.

However, if the money in your HYSA is for an emergency fund or for a purchase in the next few years, leave it where it is. Yes, you earn a little less, but your money is safe and you don’t risk losing money due to market fluctuations – the security alone is worth it.

Warning: The highest cashback card we’ve ever seen now has a 0% introductory APR until 2026

This credit card isn’t just good – it’s so exceptional that our experts personally use it. It offers a 0% introductory APR for 15 months, a cashback rate of up to 5%, and all somehow without an annual fee!

Click here to read our full review free and apply in just 2 minutes.

We strongly believe in the Golden Rule, which is why editorial opinions are ours alone and have not been previously reviewed, approved or endorsed by any advertisers involved. The Ascent does not cover all offerings on the market. The Ascent’s editorial content is separate from The Motley Fool’s editorial content and is produced by a different team of analysts. The Motley Fool has a disclosure policy.