Interest rates have moved meaningfully lower over the last six months. The 10 year Treasury yield, a proxy for the interest rate market, has fallen to 3.65% from 4.70%. One and two year Treasury yields and CDs, which became popular places to park cash over the last two years, are currently yielding around 4.0%. Those yields were over 5.0% earlier in the year. The decline in interest rates could spark changes in spending and saving habits.
High yield savings rates are moving lower
High yield savings accounts offered by companies like Discover, American Express, Ally and others, were recently paying 4.0%-5.0% on savings. Compared to banks like J.P. Morgan and Bank of America, which pay 0% on savings, these rates are obviously attractive. And while the high yield accounts are still paying very high rates compared to the J.P. Morgan’s of the world, those rates have started to move lower.
When interest rates were still rising, companies like Discover marketed their ever increasing savings rates. Check out one of the emails I received last year, noting an increase in the interest rate I was earning:
“Add Money,” Discover says, prompting me to take advantage of the increased interest rate on my savings. Recently, however, I noticed the Discover rate has fallen to 4.24%. Not surprisingly, Discover didn’t send me an email highlighting the new, lower, rate.
So that’s the first thing savers need to pay attention to: if you have money in a high yield savings account, keep an eye on the rate you’re currently earning.
To check your current interest rate, look at your most recent statement:
Some companies, like Wealthfront are still marketing higher yields, but it’s only a matter of time before those move lower too. Wealthfront notes on their FAQ page that their interest rate will move lower if the Fed lowers interest rates, which the Fed is expected to do.
Rates are still near 15 year highs
Even if your high yield savings rate drops to 3.50-4.0% in the coming months, that will still be a higher rate than anytime in the last 15 years (pre 2023). This interest rate is also above the inflation rate, something that wasn’t the case for a period between 2022-2023. So, while your “nominal” savings rate is declining, your “real savings rate” may actually be increasing.
Here’s one piece of advice: don’t go crazy looking for the highest yield available. At any given moment there will always be a bank offering a higher rate than what you currently have. But in general, the banks offering competitive yields play in the same ball park and will be pretty close together. Consider the convenience factor too; if you are still getting 4% or more from a reputable, FDIC insured institution, then what’s the problem?
Now, if you are willing to move money out of a savings account and into a brokerage account, then higher yields are certainly available. Three and six month treasury bills are still yielding between 4.85% and 4.60%, respectively (down from 5.50% a few months ago). Those rates are annualized (so the actual return over three or six months will be around 1.20% or 2.3%). Still, those rates are “locked in,” meaning if you purchase one today you will earn that rate until maturity. The high yield savings rate could, and likely will, move lower within the coming weeks after the Fed cuts rates on September 18th.
In addition, interest earned from Treasury Bills is exempt from state taxes. So an Illinois resident is shielding 5% from state taxes by earning interest from a Treasury bill instead of in a high yield savings account. Residents in high tax states like California, New York, or New Jersey should strongly consider Treasury Bills over high yield savings or CDs.
Keep saving with intention
Naturally, when “risk free” interest rates go down, savers tend to seek out higher yielding products. But you must be careful… if you were content to avoid risk in order to earn 4-5% “risk free” when rates were high, you shouldn’t change your approach just because rates are 0.50%-1.0% lower now.
If your intention for the money is to have it totally safe, than you should be pretty agnostic to the fluctuation in rates in the grand scheme of things. However, if you’ve just been stacking cash because it was “easy” and you never really considered alternatives, the change in rates could be a wake up call.
Have you neglected investments in the stock market because of high savings rates? If so, that isn’t just a mistake now because rates are moving lower, it was a mistake at the time you made the decision. Don’t confuse our point, we’re not saying not to save, but there can be a risk in saving too much! Just take a look at the returns a balanced investment of stocks and bonds has provided over the last two years compared to money market funds (a proxy for savings rates):
It’s always a good time to check in
The average person logs into their 401(K) more often when the stock market is going down. We suspect the same logic will apply to savings accounts now that interest rates are going down. So if you think you might need to make some adjustments to your saving strategy, then start that planning now. Don’t wait for rates to fall even more to then decide, “Okay let me see what else is out there.” You want to be proactive, not reactive.
Clients can schedule a check-in with us here. Interested prospects can schedule a free consultation here.
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