High Yield Savings Account | Why Bother at Present Rates?

People ask me why open a high yield savings account these days when rates are only 1.35%?  In all fairness that is a good question, because there are plenty of higher paying CDs out there – but CDs as we know have their problems too.  Making a decision to open a high yield savings account when rates are so despondently low these days doesn’t seem like a good use of spare cash – but there are benefits to doing it.  Let’s look at a few reasons.

Inflation May Be at Historic Lows Presently
I recently saw in my savings bond email that the inflation rate for the inflation adjusted savings bonds I own was actually negative for parts of the last twelve months, indicating that we experienced a period of DE-flation.  Deflation was one of the great cataclysms of the Great Depression of the 1930s.  Deflation is a price scenario when the price of goods is dropping (think automobiles over the last year) and yet no one is buying.  Note that automobile sales didn’t pick up until the government stepped in and started shelling out cash for clunkers to get cars moving.  Watch what happens to auto sales once the money dries up.  Can you say **poof**

What this means to you and your high yield savings account is that even though present interest rates are ridiculously low, odds are very good they are STILL higher than the inflation rate (or deflation rate) right now.  If and when prices begin rising again – interest rates will begin to rise and your high yield savings account will follow.  Think a local brick and mortar bank savings account rate will rise as well?

High Yield Savings Account Yields Move with Prevailing Fed Rates
High yield savings accounts get their name because they offer the best short term interest rates on fully liquid deposit accounts.  As interest rates rise at the central bank, online high yield savings accounts match or lead the Fed Rate, keeping the short term savings deposits competitive vs. treasuries and against inflation.  Some banks do offer slightly higher yields on certain high minimum balance accounts ($10000 or perhaps $100000 minimum balances), so not ALL the money deposited in the high balance accounts is fully liquid and one does have to read the fine print vis a vis rates.  Likewise for CDs re: balance and rates.

The Danger of Opting for a High Yield CD
The great fear of anyone considering plonking money into a high yield CD these days is that rates will rise and the income from those presently anemic CD rates will be exposed.  CD rates are locked in for a fixed period on most CDs (although some banks offer “step-up” CDs that can reset once or twice sometimes). Opt in to a high yield long term high balance CD and the odds of getting yield exposed jump dramatically.

Low Yield Environment Favors Highly Liquid High Yield Savings Accounts Over CDs

The present interest rate environment strongly favors high yield savings accounts over CDs due to the risk of locking in a long term CD at an extremely unfavorable rate.  The word here is that interest rates should rise quickly once the liquidity crisis is more or less past.  I would expect rates will rise off the 0-.25% floor of the last several months to the ending target rate range of 3-5% within two years, beginning later this year.  Keeping money liquid in a savings account is wise over this period given the rate jumps of Bernanke have tended to be much more pronounced than the incremental shifts of Greenspan.

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