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What is Variable APY, and How Does It Affect Your Savings?

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Before the pandemic, I opened an emergency fund through a high-yield savings account earning 1.7 percent interest each month. I chose Capital One 360 Performance Savings for its high yield and monthly compound. Fast forward to the end of September and I was earning just 0.5 percent each month, less than a third of the initial yield. Various competitors were down, too.

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Most high-yield savings accounts earn a variable annual percentage yield (APY). The rates aren't fixed. Rather, they fluctuate from month to month, largely in response to the state of the economy. You can imagine why the 2020 economic standing has not been good to high-yield savings accounts across the board, but it's not permanent (hence the term "variable").

Why are high-yield savings account APYs variable?

APYs can change at a moment's notice and often go up and down with the federal rate. The federal rate tends to fluctuate based on the state of the economy—so the better the economy, the higher the interest you receive. 

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In economic downturns and recessions, APYs decrease to allow consumers to borrow money cheaper. Giving out less interest means charging lower interest rates for other financial products (like a home mortgage or auto loan, for example). 

This makes lower interest rates good for those borrowing but unfortunate for those saving. Increased rates of saving aren't actually good for the economy (in March, U.S. credit card debt fell to its lowest in 30 years) due to decreased spending. However, the urge to stockpile in an uncertain time is only natural. 

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What are the latest APYs?

As of Oct. 1, Ally Online Savings Account was earning 0.60 percent APY. Capital One 360 Performance Savings hit 0.50 percent and Marcus by Goldman Sachs Online Savings Account was at 0.60 percent. Varo Online Savings Account was at 0.81 percent. These are just a handful of high-yield savings accounts available to consumers.

All of these APYs are subject to change, whether in the positive or negative direction. While they're much less than they were at earlier in 2020, they're still quite impressive compared to the national rate for regular savings accounts. Even a 0.50 percent APY is 20 times better than the national savings rate of 0.05 percent according to the FDIC.

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A high-yield savings account can still give you solid returns in a recession

Pulling out of the market because you got into an accident or your dog needs surgery is no fun. High-yield savings accounts can be a great place to keep your cash liquid while still earning compound interest on a monthly basis.

Despite the fact that variable APYs go up and down in what feels like the blink of an eye, savings accounts are the perfect place for emergency funds.

Just know that, when it comes time to choose a high-yield savings account, APY should not be the only deciding factor. Keep in mind other perks, like whether the account compounds interest monthly, how responsive the customer service is, and how user friendly the platform is.  

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