Savings Rates Are Staying Low. Here’s Why, and What to Do

If your bank has lowered rates on your savings account, don’t take it personally. It’s not you, it’s them. Interest rates have dropped across the board, and they’re likely to stay low for a while.

Yes, your savings may be earning smaller yields, but with a little time and attention, there are still ways to eke out growth.

Why are rates so low?

Banks tend to lower or raise interest rates in response to actions from the Federal Reserve. The Fed, in turn, makes decisions based on economic conditions. When the economy needs a boost, moves by the Fed generally cause rates to drop. Why? Interest rate decreases can encourage businesses and people to take out loans, increase spending and stimulate the economy. (Rate increases in a strong economy, on the other hand, can help slow inflation.)

With the ongoing pandemic, the Fed has taken actions to stimulate the economy.

"The Federal Reserve’s latest economic forecast suggests that they will keep interest rates near zero, at least through 2023," says Daniel Lee, a chartered financial analyst and certified financial planner in San Francisco.

This means savings rates are likely to stay lower for a few years. But it doesn’t mean your savings goals should be on pause.

You can still make smart money moves

Interest rates are just one part of your personal finance picture. It is also important to put away money regularly, regardless of the rate, so your cash cushion can grow. Once you’ve started saving, here's what you can do to make the most of what you have.

Compare savings rates from other banks The national average savings account interest rate is 0.45% APY. If your savings account earns more, you can consider it above average, even if it earns less than it did last year. But you may still benefit from seeing what other financial institutions are offering. And if your rate is lower than average, you should absolutely shop around. Some high-yield savings accounts and certificates of deposit, particularly those that are online-only, earn more than 10 times the average yield.

According to Lee, those are the accounts where you should be putting your money. "Not all savings yields are created equal," he says. "You want to search for banks that are offering the best rates because every dollar counts."

To see what other options are available, check out current high-interest savings accounts or high-yield CDs.

Whether you choose a savings account or CD likely depends on how often you plan to make withdrawals. You can generally transfer money out of savings accounts a few times a month without penalty. With CDs, you usually agree to keep your deposit in the account for a set time frame — say, six months or up to five years. In exchange, you might earn a slightly higher interest rate compared with savings accounts.

Eliminate existing bank fees You can’t make your bank pay more interest, but you likely can stop it from charging you money. If your checking or savings account charges a monthly fee — often $5 or $10 a month — consider switching to an account that doesn't.

You can also look for ways to get fees waived. For example, some banks let customers avoid maintenance charges if they sign up for direct deposit or maintain a certain minimum balance, typically around $500.

You can also keep tabs on your balance; this makes it easier to avoid overdrawing your account. Many institutions charge fees of $35 or more for each overdraft. If you have three in one day, your bank could slap a fee of more than $100 on your account.

By avoiding fees, you can probably keep more money than you would ever gain in interest, even if rates were higher.

Consider account sign-up bonuses Some banks offer promotions to new customers who open an account and meet certain conditions. Qualifying accounts could receive bonuses of $100 or more. The conditions might include signing up for direct deposit, making a certain number of debit card purchases or maintaining a minimum balance for a few weeks.

If you’re thinking about switching banks — because your bank is charging one of the fees mentioned above, for example — consider moving to one that offers a bonus. If you qualify, the extra cash could more than make up for a relatively low interest rate.