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There's a lot of chatter in the news these days about Fed interest rate cuts starting this month. If the Fed cuts interest rates, does that mean opening a high-yield savings account is a bad deal?
No! Even if interest rates go down soon, there are still several good reasons to open a savings account. Here are a few reasons why you should keep your cash in the bank, and keep looking for the best high-yield savings accounts in September 2024.
1. Savings accounts keep your money liquid
One of the best reasons to open a savings account is to keep your money "liquid," meaning it's easily accessible and you can withdraw your cash at any time. If you have an emergency savings fund of a few thousand dollars (or less), it's important to have that money ready to withdraw on a day's notice.
Opening a CD instead of a savings account can be the wrong move for your emergency fund. That's because CDs make you lock up your money. If you take your deposit out of the CD before the agreed-upon length of time (or "term"), the bank can charge you early withdrawal penalties.
Savings accounts are simple, easy to use, and flexible. Your money is there when you need it, with no penalties. No matter what happens next with Fed interest rate cuts, the liquidity and freedom of accessing your cash make savings accounts a good choice.
2. Savings accounts still pay good interest
Even after the first Fed interest rate cut, the best savings accounts will likely still pay fairly high interest -- perhaps as high as 5.00% APY. If you can put $10,000 into a savings account that earns 5.00% APY, that means after one year, you'll have earned $500.
Keep in mind that unlike CDs, savings account rates are not fixed -- the APY on your savings account can change at any time based on Fed interest rate changes or the bank's decisions. And no one knows for sure what the future of savings account rates will be. The Fed might keep cutting interest rates throughout 2025, and drive down APYs by 1.00% or more.
But even if the best savings account APYs go from 5.00% to 4.00% (or less), savings accounts offer guaranteed "passive income" on your savings. You don't have to do anything, you don't have to take risks -- you just have to sit back and watch your money grow.
3. Savings accounts are safe compared to stocks or other investments
Speaking of risks: another good reason to open a savings account is that savings accounts are safe. In fact, savings accounts are generally considered to be one of the safest places to keep your money. As long as you use a bank that's a member of the FDIC, your savings account is FDIC insured in case of bank failure (protected up to $250,000 per depositor, per FDIC-insured bank, per account ownership category).
If you're worried about losing money in the stock market, keeping cash in a savings account is a safe strategy. Any short-term cash, like an emergency fund or money that you're saving for a short-term goal (such as two or three years from now) should probably be kept in a savings account.
There's such a thing as holding too much cash in your portfolio, but most Americans don't have that problem. You don't have to invest every dollar. If you only have a few thousand dollars of cash (or less) outside of your 401(k) or other retirement accounts, and you don't want to risk losing your money to the volatility of stocks or other potentially risky assets, keeping your cash in a savings account is a smart move.
Bottom line
Opening a high-yield savings account gives you flexibility for using your money, the guaranteed protection of FDIC insurance, and respectable earnings on your cash. Even if the Fed cuts interest rates soon, the best savings accounts might still offer 5.00% APY.
There's nothing wrong with keeping your emergency fund and other short-term cash in a safe, accessible bank account that earns interest.
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