Savvy savers know that one of the best places to stash your emergency fund and other cash savings are in a high-interest savings account. You want to avoid keeping too much money in the bank, but if you need liquid assets you can access quickly, you want them to be securely stored in a bank account. Ideally, that bank account has an interest rate that is high enough to help that money continue to grow, even if it doesn’t grow as quickly as it might if invested: For these reasons, high-interest savings accounts are one of the best places to keep your cash savings.
But what happens when those high-interest savings accounts lose their high interest rates?
Just a few months ago, the best high-interest accounts on the market were offering upwards of 2 percent interest. Today, most are around 1.5 percent, and there’s no guarantee that those rates won’t continue to fall. The March 2020 federal funds rate cut from the U.S. Federal Reserve took the rate down to 0 to 0.25 percent, a sharp drop from the peak rate of 2.25 to 2.5 percent that lasted from December 2018 to August 2019. For the wider economy, lower interest rates mean borrowing money is more affordable, and those with debt (either credit card debt or mortgage loans) can access lower interest rates on their balance, saving money on their loan payments. For those trying to save smartly, though, lower interest rates reduce how much their money is able to grow while in savings.
So what should you do with your savings while interest rates are low? Don’t abandon your savings accounts all together, says Lindsey Bell, chief investment strategist at Ally Invest.
“Online savings accounts, high-yield savings accounts…they’re all still good,” Bell says. “While they might not be yielding as much as they did in the past, they are FDIC-insured. They are safe if something goes wrong.”
In other words, your interest rate may have fallen, but that doesn’t mean it’s a sign to leave your beloved high-interest savings account behind. If you’re concerned about further interest rate drops, though, or you do want your savings to grow more quickly than it would in a bank account, you have low- or no-risk options.
“The first question you have to ask yourself is, ‘When do you need the money?’” Bell says.
Many investment options only deliver substantial returns over a longer period of time. If you’re going to need to withdraw and spend your money within a few years, it may be best left in a savings account. If you don’t expect to need it for a while, though, and have enough cash savings to see you through an emergency or unexpected job loss, you can consider other options.
“One option for consumers looking to grow their savings outside of a high-interest savings account is a high-yield No-Penalty Certificate of Deposit (CD),” says Shirley Yang, VP of deposits at Marcus by Goldman Sachs.
Marcus offers a No-Penalty CD: It has a fixed high-yield rate, so it won’t go down if interest rates continue to drop, and it offers customers more access to their money than they would get with a traditional CD.
“Consumers can lock in a fixed rate high-yield no-penalty CD and still have the ability to withdraw their full balance without any penalty or fees, beginning seven days after funding,” Yang says.
As of publication, Marcus’s No-Penalty CD has a fixed rate of 1.55 percent for seven months. (If you can manage without the money for the length of the CD, a traditional CD in which you would pay a fee for withdrawing your funds early may offer a higher interest rate.) Ally also offers a No-Penalty CD, with rates starting at 1.4 percent and climbing based on your minimum opening deposit. (See more No-Penalty CD options as ranked by NerdWallet.)
If a CD doesn’t seem like a smart option for you and your financial goals, you can also consider a money market account, Bell says.
A money market account is like a savings account, but money market accounts typically come with checks or a debit card that you can use to directly access the money in the account. (Money market accounts tend to be more restrictive than savings accounts, with withdrawal limits and balance minimums.) Rates on money market accounts vary and are often lower than those on high-interest savings accounts, but they are a FDIC-insured alternative if you want your money to earn interest and have spending options.
A third alternative, according to Bell, is turning to some types of investments. This option is not for the risk-averse, she says, but if you don’t need your savings for the next five years, have an additional three to six months of emergency cash savings on hand, and have little to no high-yield debt (often credit card debt), considering certain investment options might get you a higher return than letting your money sit in a savings account would.
You can research ETFs and stocks or establish a managed portfolio account or robo-account if you’d rather be more hands-off. Maxing out your 401k or IRA are tax-advantaged options that also allow you to save for the future. The key is to do your homework and diversify your investments. Now is a good time to buy—Bell says Ally Invest has seen increased investing interest during this health and economic crisis—so if you’re able to, it’s worth considering.
If the thought of investing is too stressful for you, just remember that a high interest rate isn’t the end-all, be-all of a good savings account, and that you can keep your money where it is if you’re comfortable with its growth and security.
“While a competitive rate is important, there are other considerations when choosing a savings account, such as: Is your money FDIC insured? Does your account have fees? Are there minimum deposit requirements? And does the bank have customer service that you can access via phone, app, or online?” Yang says.
In those areas, a bank account offers something some investment options don’t. Wherever you choose to stash your hard-earned savings, think about it carefully: You want your money secure and accessible, of course, but you also want it to continue to grow.