One downside to high-yield savings accounts is:

I love saving money and have been saving for years. I keep my extra cash in a high-yield savings account to earn interest while the money is in the bank. This type of savings account is ideal for people who want to earn rewards for their savings.

However, there is one downside to high-yield savings accounts that you should be aware of. Let us explain this in more detail so you can better decide where to store your extra cash.

How High Yield Savings Accounts Work

It is wise to keep your savings in an interest-earning bank account. High-yield savings accounts pay interest, and the interest rates are typically higher than traditional savings accounts. Opening a high-yield savings account is a smart strategy that can help you earn more while continuing to save. The longer you keep your extra cash in the bank, the more interest you can earn.

Rates may change.

Many of the best high-yield savings accounts now offer interest rates of 5.00% or higher. If you have a sizable emergency fund or other savings, you can earn a significant amount of money through interest. But while interest rates are high now, they may not be so in a few months or even next year.

Banks can change interest rates at any time. When savings account rates go down, you’ll earn less interest. If you’re working hard to reach your savings goals and want to maximize your interest, this is something to consider.

Impact of interest rate changes on consumers

Changes in interest rates affect consumers. The Federal Reserve interest rate (or federal funds rate) is the interest rate at which banks and credit unions borrow money from each other. The Federal Reserve makes decisions regarding the federal funds rate.

From March 2022 to July 2023, the Federal Reserve raised interest rates 11 times to tame inflation. Many banks adjust their interest rates when the Federal Reserve rate cuts or increases, which affects consumers’ wallets.

Higher interest rates on loans, such as mortgages, mean consumers pay higher interest costs when they borrow money. However, consumers with savings accounts can benefit. If banks raise interest rates after the Federal Reserve raises rates, consumers with high-yield savings accounts could earn more interest on their savings, which could benefit their personal finances.

Here’s how to lock in the interest rate on your savings:

You can explore other banking products to avoid interest rate fluctuations. Certificates of deposit (CDs) are another bank account option. CDs generally offer higher interest rates than high-yield savings, and the interest rate is guaranteed for a set period of time.

This product can be an excellent solution for savers who are worried about exchange rate fluctuations. However, these types of accounts require you to keep your money in the bank for a certain period of time. The length of time varies, but can be as short as a few months or as long as five years or more. If you withdraw money before the end of the CD term, you risk being assessed an early withdrawal penalty.

Penalty fees can be expensive and usually involve a certain number of months of interest. You can avoid withdrawal penalties by opening a no-penalty CD. However, these CDs typically offer lower prices. CDs are ideal for savers who don’t plan to use their savings anytime soon.

If you need to access your money in the coming months, don’t store it in a CD. However, if you don’t plan on using your savings anytime soon, a CD may be worth considering. Check out our best CD rates for more information.

Savers must monitor rates

If you have a savings account, pay close attention to the interest rates. If you’re not paying attention, you could miss rate changes. Rate changes may affect your income. But remember that any money you make is better than nothing. So even if interest rates fall, it’s better to keep your cash in a savings account than to keep it in a checking account and not earn interest.

This savings account is FDIC insured and can earn 11 times the bank’s earnings.

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