Savings interest rates bottom out. Here's why you should open a high-yield savings account anyway.

Due to stimulus packages and higher-than-average savings rates, the pandemic recovery could be one of the fastest comebacks in U.S. history, says Bank of America's Ethan Harris. Although nearly not as high as in the distant past, Annual Percentage Rates (APRs) are holding steady at 0.52% to 0.60% on average.

High-yield savings accounts (HYSA) earn higher interest than traditional savings accounts. Rates are variable, meaning they change along with the economy and the Federal Funds rates, which the Federal Reserve has lowered in response to COVID-19. If you're looking for traditional savings or you just want to make an initial deposit toward emergency funds, a high-yield savings account could be the way to go.

WHY IT'S A GOOD IDEA TO PUT SOME MONEY IN A HIGH-YIELD SAVINGS ACCOUNT

Are high-yield savings accounts worth it when rates are low?

On a positive note, lower interest rates are great news if you’re trying to pay off high credit card balances. But such low APRs may have you questioning if putting your money into an HYSA is worth it.

There are several reasons why a high-yield account is still a great place to stash away your money in the short-term:

1. Building an emergency fund.
2. Saving for a vacation or a wedding.
3. Making a down payment on a new house.
4. Paying off high-interest credit cards.
5. Earning higher interest rates than with standard savings accounts—sometimes 16X higher than the national average.
6. Your money is FDIC-insured.

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Besides, interest rates won’t be low forever. And although it’s possible the interest rate on your HYS account was higher in the past, the fact your saving money is a good thing with interest that can add up over time. It’s also worth knowing that you are limited to six withdrawals from your account per month. Go over, and you may be charged a fee.

When will rates return to pre-pandemic levels?

There’s little doubt 2020 was a rough year, brought about by COVID and the resulting high unemployment and economic decline. With no immediate end in sight, interest rates are unlikely to rise in the year ahead. The Federal Reserve has also promised to keep rates in-check through 2023.

This seems to point to savings rates remaining the same or moving very little through 2023. However, under a new administration, rates may rise over the next year if unemployment rates drop and the economy improves.

4 FACTORS TO CONSIDER WHEN CHOOSING A HIGH-YIELD SAVINGS ACCOUNT

What is a good interest rate for a high yield savings account?

The national average on high-yield savings accounts is lingering at around 0.6%. Historically, the national average on high-yield accounts has yielded over 1%, but some accounts offer 16X the national average. If you’re earning between 0.5% and 0.6%, you’re earning the best rates available today. But what does your personal financial situation look like? Are you meeting your savings goals? Is a traditional savings account not generating the annual percentage yield you want?

Can you lose money in a high-yield savings account?

High-yield savings accounts are FDIC-insured, so your money is safe. However, it is possible to lose money with an HYSA.

• The money you earn in interest is taxed. You aren’t taxed on your initial deposit or any subsequent deposits you make into your account. If you make more than $10 in interest in one year, you must report it on your tax return. Generally, the tax rate is determined by your average tax rate.
• Inflation. As a general rule, any time your HYSA doesn’t grow at the same rate as inflation, you lose money.
• Variable interest rates. If your HYSA earned .80% five years ago and rates have dropped to the lowest ever, and your account is now earning just .50%, you are essentially losing money.
• Hidden fees or high minimum deposits. Some HYSAs come with high minimum deposits, limited introductory offers, and hidden fees. You’re not actually losing money, but you’re not earning as much as you could without the costs attached.

Lower rates on HYSAs are discouraging. The annual percentage yield isn't great. But if history repeats itself, and Bank of America's Ethan Harris is right, rates won’t stay this low forever. If you’re socking money away for an unexpected emergency or to pay for that vacation that’s been put on hold due to the pandemic, an HYSA is a safe option.

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