Why Your Savings Rate Dropped Without An Email

I noticed it on a Sunday, scrolling my banking app for no reason. The interest line on my savings account had gone from a number I was quietly pleased with to a number that was roughly a third of it. No email, no notification, no banner.

That is not a bank being sneaky. That is what variable means, and almost every savings account in the country is variable.

The three links

First link. The Federal Reserve sets a target range for the rate banks charge each other to borrow overnight, and it pays banks a rate on the reserves they leave parked with it. That is the policy rate, and it is the price of money for one night at the safest counterparty there is.

Second link. A bank that takes your deposit has to do something with it. It can lend it out, buy short government debt, or park it at the Fed and collect that rate for doing nothing at all.

That last option sets the floor on what your deposit is worth to the bank, because no bank will pay you more for money than it can earn by parking it.

Third link. The bank prices your savings account somewhere under that floor and keeps the difference. When the policy rate falls by a percentage point, the thing your deposit can earn falls by a percentage point, and your rate follows it down.

Nobody has to email you, because the account agreement you signed says the rate is variable and may change at any time. The rate lives on a disclosure page, it gets updated, and the update is the notification.

The part that is not symmetric

Deposit rates fall quickly when the policy rate falls and rise slowly when it rises. Banks compete for deposits when they need funding and stop competing when they do not, and a customer who has not moved money in six years is not a customer they need to win.

This is also why a large branch bank and an online-only bank can pay wildly different rates for the identical product. The branch bank is buying something else with the gap: the branch, the ATM network, the fact that your direct deposit and four autopays are already wired to that account number.

On $20,000, an account paying 4.2% throws off $840 a year. An account paying 0.4% throws off $80. The difference is $760 for a transfer that takes about fifteen minutes, and both of those accounts are sitting on the same street.

What to actually do

Find your current rate. It is on your statement, or on the account details screen, or on the bank's rate disclosure page, and it is usually listed as APY, the annual percentage yield, which is the rate after the effect of compounding is included.

Then compare it to the policy rate. If the policy rate target range is somewhere around 4% and your savings account is paying 0.4%, your bank is keeping roughly nine tenths of what your money earns. That is a defensible business model and a bad deal for you.

Two more things worth checking while you are on that page. Whether the advertised rate applies to your whole balance or only to a tier, because some accounts pay the headline number on the first $5,000 and far less above it. And whether it is an introductory rate with an end date attached to it.

If you want a rate that cannot be moved under you, that is what a certificate of deposit is for. You give up access for a fixed term and the bank gives up the right to reprice you, which is the same trade running in both directions.

Set a calendar reminder for six months out to do the check again. The rate that was competitive when you opened the account is not a promise about anything, and the bank is under no obligation to tell you when it stops being true.