This Downside to Savings Accounts Should Matter to You Now More Than Ever

Savings accounts can be a good place to keep your money because they are risk-free. If you choose an FDIC-insured account, you can be confident your money will be available when you need it. Although there may be some monthly withdrawal limits, you can also access your money when you want it.

Right now, savings accounts are paying a pretty generous rate of return. While the national average savings account rate is just 0.46%, many accounts offer yields upward of 5.00%. Unfortunately, despite these benefits, there is a downside of this kind of financial account -- and it's one you should care more about now than ever.

Savings account interest rates are variable

The big downside of savings accounts is that the rates they offer are variable. They are typically not set in stone or guaranteed to last for any set period of time. You could open a savings account today earning 5.00% and if market conditions change, could find yourself with an account paying 0.05% APY instead. There would be nothing you could do to stop that from happening, if the bank followed its terms and conditions when setting rates.

Because savings account rates are variable, the generous yields being offered right now are absolutely not guaranteed to last. Rates are high right now because the Federal Reserve repeatedly raised interest rates in 2022 and 2023 to fight the inflation caused by the pandemic, and consumer rates are linked. But many experts predict that rates will fall this year, and your savings account rate could in turn end up being much lower than what you're getting now.

In 2019, before COVID-19, some of the best high-yield savings accounts offered rates of around 2.00% to 2.50%. During the pandemic, those rates fell even further and ended up being less than half that amount (even for high-yield accounts). Depending on how far rates fall, it's entirely possible that savings account yields could go back down to the 2.00% to 2.50% range in the coming years.

So, while you may be excited about earning a virtually risk-free 4.00% or 5.00% right now, don't count on this lasting.

Do you have any alternatives to a savings account?

If you're frustrated by the fact that the variable yields on savings accounts could soon mean you earn less on your funds, you do have an alternative to consider: a certificate of deposit (CD).

CDs tend to offer even higher yields than savings accounts do. And each CD you open will have a set term (usually between three months and five years). During that term, you're guaranteed to get paid the rate you were promised when you signed up. So, if you choose a 10-month CD offering a 5.10% APY and rates fall five months from now, you'd still get that 5.10% for the entire 10 months your money is invested -- unlike if you had a savings account.

Now, you have to agree to keep your money invested for the duration of the CD term to avoid penalties -- that's the big downside of using a CD instead of a savings account. But if you're saving for a goal that you're a few months or a few years away from -- like buying a house in three years -- then putting that money into a 3-year CD could help you ensure you get to keep earning at today's higher rates.

It's at least worth considering a CD, since that variable rate used by savings accounts could be a real disadvantage if rates soon fall.