Is My High-Yield Savings Account Still Worth It?

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Rates probably aren't going to rise anytime soon. Here's what you can do.

Less than one year ago, it wasn't difficult to find high-yield savings accounts offering 1.50% APY or higher. Some had APYs in excess of 2.00% APY. Now, thanks to the pandemic-induced recession, you're lucky if you can find half of that. It's discouraging for savers. Some are wondering whether they'd be better off putting their money elsewhere.

The answer to that is: maybe. It depends on what you plan to use the money for. Here's a closer look at why high-yield savings account rates have been falling and whether they're still the right choice for your money.

Why high-yield savings account APYs have fallen

In response to the pandemic, the Federal Reserve slashed the federal funds rate to almost zero. This is the rate that banks use to lend money to one another. They also use it as a baseline when determining the rates to set for their customers. Usually, when the federal funds rate is low, savings account rates are also low. When the federal funds rate rises, savings account APYs go up too.

If the Federal Reserve decides to raise the federal funds rate, you probably won't see your savings account rate change overnight. However, in the weeks and months that follow, your savings account APY will begin to inch upward.

The Federal Reserve dropped the federal funds rate in mid-March as the country shut down due to the pandemic. Since then, savings account rates have fallen dramatically. Some continue to decline, although at a slower rate than they did early on in the pandemic. Things aren't likely to change until the economy begins to show real signs of recovery -- which could be awhile. For now, we have to get used to the new normal of lower savings account rates.

Is a high-yield savings account still the right choice for your money?

A high-yield savings account is still the best place for emergency savings or savings you plan to use in the next couple of years. True, you won't earn much interest now as you did in previous years. But online high-yield savings accounts still offer much higher rates than what you find with traditional savings accounts at brick-and-mortar banks.

If you're not happy with your current savings account's APY, it doesn't hurt to explore other options. You may be able to find another high-yield savings account that offers a better rate than yours. Don't forget to check the new account's fees, balance requirements, and deposit and withdrawal options.

You could also try a certificate of deposit (CD) for funds you don't expect to use for a few months or years. CD rates are often higher than savings accounts rates. This is because CDs require you leave your funds untouched for an extended time.

CDs usually lock in your rate for the full term, so one of these can help protect you against further rate decreases. On the other hand, if you choose a CD with a long term and banks begin raising their savings and CD rates, you'll be stuck with your lower rate. Right now, short- or medium-term CDs are the best option.

Investing in the stock market is also an option. Again, only use funds you won't need to touch for several years. Investing can earn you much larger returns than any high-yield savings account. Unfortunately, the stock market can be volatile in the short term. Don't invest your emergency fund or money you might need soon -- you could be forced to sell it at a loss in a crisis.

It's going to be a long time before we see high-yield savings account APYs rise to pre-pandemic levels. But that doesn't mean you necessarily need to abandon your savings account completely. Keep an eye on high-yield savings account rates, and consider alternatives if they suit you. Above all, be patient. Rash financial decisions rarely turn out well. Don't move your money around until you've thoroughly considered your options and feel confident in your decision.

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