Don’t Go Chasing APY
If you have an online bank account or other high-yield savings, chances are you got an e-mail this week informing you that your interest rate was being cut. That’s thanks to the Federal Reserve cutting rates by a half-a-point in an emergency move amid the spread of COVID-19. Yes, that’s kind of a confusing sentence as cheap car loans aren’t going to prevent you from contracting the virus — but the move is meant to help bolster the economy, which could suffer as global governments work to protect their citizens. In any case, I’ve seen plenty of complaints from customers upset about these falling APYs, with some threatening to take their business elsewhere. While that is certainly their right, it’s probably not the best idea.
While I too have been guilty of emphasizing APY rates as a means of comparing bank accounts and determining which is better, it’s important to understand what the differences in these decimals really mean. With the 0.5% cut that this week brought, those with $1,000 in a savings accounts will earn $5.00 less in interest over the course of a full year. I’d love to have an extra $5 as much as anyone else would but I’m confident that I’ll survive without it. Of course, the $50 you’d miss out on with a balance of $10,000 is more significant, but not the end of the world if you already have $10K on tap.
To be fair to those freaking out, however, it is worth noting that, for some accounts, this cut amounts to nearly one-third of what they’d have gained in the first place (for example, my SoFi Money went from 1.6% to 1.1%). Also, this latest lowering comes after two other quarter-point cuts in the past year. Therefore it’s understandable to feel as though you’re money is under attack.
With that in mind, you may be tempted to start looking elsewhere. The problem is that, in most cases, your banks aren’t really to blame for these rate cuts (they do need to make money after all). So, while you could move your money to a new account, there’s a good chance you’ll only end up earning a few basis points more than you are currently. Plus, even as someone whose cash is spread across more than half-a-dozen accounts, I can still say that opening and setting up a new account can be a hassle.
For those who are savers and don’t plan on taking on any debt, the Fed’s emergency rate cut may be annoying as it means a lower APY on your money. But, before you go through the trouble of finding a new home for your emergency fund or other extra cash, consider if a few dollars a year is really worth the effort. Also keep in mind that, just because a bank account has a higher interest rate doesn’t mean it offers a better banking experience. Thus, if you are deadset on making a switch, be sure to do your research and make the best move possible.