7 Smart Savings Tips to Weather the Fed Changes to Interest Rates

The federal funds rate is the target interest rate set by the Federal Open Market Committee (FOMC), a committee within the Federal Reserve System (often referred to as the Fed).

The Fed continuously monitors economic activity to determine whether to raise or lower interest rates. When rates increase, borrowing money becomes more expensive and savings rates rise. When rates fall, the opposite happens.

In short:

• When rates go up: borrowing = more expensive, saving = pays more.
• When rates go down: borrowing = cheaper, saving = pays less.

Why rates change

Rate changes are normal. The Fed (the U.S. central bank) changes them to help keep prices stable and people working.

When things get tough (prices are rising too fast or people can’t find jobs), the Fed may lower rates. This makes it cheaper for people and businesses to borrow money, which can help the economy grow and create jobs.

When the economy is strong (prices are stable and jobs are easier to find), the Fed may raise rates, which makes borrowing more expensive but helps prevent the economy from overheating. It also keeps inflation under control.

When the Fed cuts rates, banks often lower the interest they pay on savings accounts, so the money you earn from your savings may decrease.

This has three main effects for savers:

1. Lower APY: Your annual percentage yield (APY) will likely drop, which means the rate of return on your savings goes down.
2. Slower growth: Because your APY is lower, the money you earn from interest will accumulate more slowly.
3. Reduced incentive to save: With less interest paid out, some people may find it less appealing to keep large balances in savings versus considering other options.

This shift is industry-wide, not limited to one or two institutions.

Will HYSA rates go down?

One of the downsides of the Fed cutting the federal funds rate is a likely decrease in the APY of savings accounts. If you’ve heard about a Federal Reserve rate cut on the news, expect possible changes to the APY for your high-yield savings account.

1. Focus on the whole picture, not just APY

Your savings account’s APY is an important factor when choosing a savings account – but it’s not the only thing to consider. These factors also matter:

• Fees: Even if your savings account pays a good rate, monthly maintenance fees from the bank can take money out of your account. That means you end up earning less overall.
• Access: If you can’t access your money easily via an app and online, it’ll be harder to save.
• Daily savings habits: Does your bank make it easy to save, or is it up to you to remember? If the latter, you may actually save less money, even with a higher APY.

2. Automate your savings

The best way to maximize your savings is to automate it. Schedule monthly transfers to your savings account to ensure you’re saving a little every month.

3. Save a little as soon as you get paid

You’ve just been paid – hooray! But don’t head out on that shopping spree just yet. When your income arrives, prioritize saving before spending.

Consider saving with the 50/30/20 budgeting rule:

• 50% of your income goes toward needs (like your rent or mortgage payment, utilities, groceries, and healthcare)
• 30% goes toward wants (like meals out, entertainment, vacations, and clothes)
• 20% goes toward goals (like your emergency savings account or a new car fund)

4. Build a safety net first

An emergency fund is a must for everyone. It can help cover unexpected expenses, such as car repairs, emergency medical bills, or an unexpected loss of income, without resorting to debt.

Focus on building your financial safety net before thinking about long-term investments. Even bumping your savings account to $500 to $1,000 is a strong start, or shoot for a monthly savings goal, like $20-$100.

5. Get everyday rewards

Savvy savers can find ways to make money from everyday purchases. Look for ways to earn cash back or perks on purchases such as gas, groceries, or dining.

6. Track your progress

Check your savings account regularly to see your nest egg increase. Monitoring your progress toward a savings goal can be a great way to stay motivated.

And as you reach your goals, make sure you celebrate your accomplishments!

7. Stay informed (Without stressing)

It’s smart to stay informed about the economy and the current federal interest rate, but don’t let it stress you out. Interest rates fluctuate, period.

Rather than worrying about short-term changes to Federal Reserve interest rates and how they will affect your savings APY, focus on developing steady financial habits, like saving regularly and avoiding debt.