3 things to consider before switching to a new high-yield savings account as interest rates drop

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  • High-yield savings account rates are dropping in reaction to the Federal Reserve decreasing its rate.
  • Some banks are decreasing their rates more drastically than others, so you might be considering switching to a high-yield savings account with a different company.
  • If you switch banks, the new bank could drop its rates too, so it may not be worth the effort of setting up a new account.
  • However, if you're already unhappy with your banking institution, this could be the time to finally change savings accounts.
  • See Business Insider's picks for the best high-yield savings accounts »

As of July 8, 2020, the best high-yield savings accounts pay 0.95% to 1.21% APY. If you're earning considerably less than this, then you may want to consider switching.

When you originally chose a high-yield savings account, you probably took factors like minimum balances and management fees into consideration. But more than likely, you chose the account with one of the highest — if not the highest — interest rate available.

After all, the main point of having a high-yield savings account is to earn more money, right?

You may have noticed that your account's rate has been decreasing, though. The Federal Reserve has already lowered its rate twice in 2020, which directly affects high-yield savings account rates. As the federal funds rate drops, your savings account rate likely does, too.

But some companies' rates are falling more than others.

When you opened the account, the company may have offered the best rate you could find. But now your account rate has dropped, while other banks' rates may be decreasing more gradually.

When rates drop, you may choose to move your money to a CD or to invest it. But if you think you'll need the money in the next year or two, it's a good idea to keep it in a savings account so you can readily access it. 

If you know you want to keep your money in savings, but your rate is dropping, should you switch high-yield savings accounts? Here are a few things to consider when making your decision.

1. If you switch, your new account's rate could drop

Maybe your account's rate has dropped to 0.26%. Your friend has an account with a different company, and their rate has only decreased to 1. Should you consider switching to their bank?

"Certainly, I would look at that," says Edward Mahaffy, president of ClientFirst Wealth Management. "But I would look at it through the prism of 'Next week [the new bank account] could be at 0.26%.'"

Mahaffy says the account with 0.26% is "more realistic to what's going on with the Federal Reserve." It's expensive for banks to offer high rates to savers. As some banks drastically drop rates, others could gradually follow suit. Mahaffy says it will be interesting to see how long certain banks will continue to offer such high rates.

"If your competition's at 0.26%, you could drop down to 0.62% and still be competitive," Mahaffy says. 

"Or, in the alternative, they have found a way to lay that money off," Mahaffy continues. He says banks could be purchasing longer-term bonds to be able to pay savers higher rates. If a bank wants to be the best in the business to attract customers, it will probably do everything it can to keep rates high.

The problem is that we don't know whether a company's rate will drop or stay relatively high. If you decide to switch, remember that a falling rate is a possibility.

2. Switching accounts may or may not be worth the effort

Setting up a high-yield savings account isn't rocket science, but it does require a bit of time and effort. Think about the steps involved in moving to a new high-yield savings account:

  • Research and select which bank to use
  • Open a new high-yield savings account with a different institution
  • Wait to be approved for a new account
  • Set up external transfers from any other bank account you may have
  • Transfer money from your old high-yield savings account to your new one
  • Wait for funds to transfer
  • Possibly close your old high-yield savings account

You may decide this time and effort is worth the extra money you'll earn in interest, especially if your account holds a lot of money and your rate has dropped significantly. However, it might not be worth the annoyance, especially if your new account's rate drops just a week later.

You should also remember that when the Fed eventually increases rates, high-yield savings account rates should go up, too. You might decide switching accounts isn't worth the effort if your rate could increase in six months, a year, or two years.

3. If you're already unhappy with your account, now could be the time to switch

Are you already on the fence about your banking institution? If you're already unhappy with poor customer service or high fees, a lower rate may be the straw that breaks the camel's back. In this case, it may be time to break up with your high-yield savings account and find one that will make you happier.

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