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In recent years, savers have won exceptionally high yields thanks to a series of interest rate hikes designed to combat inflation. Yields have fallen slightly since September, when the Federal Reserve cut the federal funds rate for the first time in more than four years, followed by rate cuts in November and December. Rates may fall further in 2025 if the Fed continues to cut rates as it has indicated.
Despite the recent drop, a high yield savings account can be a safe option to earn interest on your money without committing to a long-term investment like a certificate of deposit (CD).
With the prospect of interest rate cuts, it’s only logical to ask whether the days of high yields are behind us and whether high-yield savings accounts are still worth it. Let’s examine the question more closely.
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Yes, it’s worth opening a high-yield savings account (and why)
If you’re looking for a safe place to park your money and earn interest, it’s still hard to beat a high-yield savings account. The best HYSAs still offer APYs around 4%, about nine times more the current average savings rate of 0.43%, which includes the fees charged regular savings accounts. Unlike CDs, which often charge early withdrawal penalties, these accounts allow you to access funds when needed.
“HYSAs are still worth opening because they’re easy to understand and offer higher returns than a standard savings account,” says Andrew Herzog, associate wealth advisor at The Watchman Group.
“I would recommend that consumers find a high-yield savings account to store their funds in. More experienced investors could buy Treasuries directly for a higher yield, but a HYSA is the easiest and most liquid option.” , says Herzog.
Cathleen Tobin, CFP and financial planner at MoonBridge Financial Design, also recommends HYSAs for short-term savings goals.
“High-yield savings accounts are still a good place to keep cash that the owner expects to use in the next six to 12 months. It’s easy to forget that interest rates were close to zero just two years ago Today, even after the rate cuts, high-yield savings accounts are still paying 4% or more interest Even if rates drop over the next few months, the money in the account will accessible and they’re going to win more inflation,” Tobin says.
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No, it’s not worth opening a high-yield savings account (and why)
While high-yield savings accounts are ideal for the short term, they may not be worth opening if you have a longer savings horizon. HYSAs have a variable interest rate, which could drop if the Fed continues to cut rates in 2025.
“A HYSA is the best place to park your funds for a goal in less than a year. However, if your time frame is longer than a year, consider a CD if the interest rate offered is higher than HYSA’s. The target time period is more than three or five years, consider other investment options such as less risky bonds or stocks,” Jovan Johnson, CFP and co-owner of Piece of Wealth Planning.
In the current rate environment, it might be advantageous to block it a longer, fixed-rate CD for a period ranging from one to five years. By buying a higher-yielding CD today, you can secure a yield of 4% or more and protect your savings against possible rate cuts.
“Something to keep in mind is that interest rates can decrease, which can reduce your earning potential over time,” says Melissa Murphy Pavone, founder of Mindful Financial Partners. “You always have to factor in inflation. If the return on your high-yield savings doesn’t outpace inflation, your purchasing power is being eroded, i.e. ‘safely broke’.”
Johnson adds that high-yield savings accounts may not be the best choice for savers looking for maximum growth potential.
“HYSA interest rates typically only keep pace with inflation. If your goal is to achieve earnings that beat inflation, you may need to explore more aggressive investment options,” says Johnson.
Benefits of opening a high-yield savings account now
If you’re considering opening a high-yield savings account, it may be advantageous to do so before rates may fall again. Note, however, that rate cuts are not set in stone; there is still a chance they will go up.
Funds you keep in a high-yield savings account are always accessible, which is preferable if you anticipate needing the funds in the near future. A CD lets you lock in the current rate for the long term, but you’ll pay one penalty for early withdrawal if you have to withdraw funds before the The CD matures.
The bottom line
You can still benefit from high rates open a high-yield savings account now, especially if you’re saving for a short-term goal and need penalty-free access to your funds. If you are in a longer savings periodyou can turn to a CD, Treasury bill, or other options that allow you to lock in a higher, guaranteed rate that isn’t affected by interest rate fluctuations. It’s a good idea to consult with your financial planner or tax advisor to choose the best account that fits your overall financial plan.