Robinhood just sent me this..

What's up, guys? It's Graham here. So, as I'm sure you all know by now, reporting on Robinhood is like this guilty pleasure of mine, and I can't wait to share much enjoyment following all the drama and pricing battles between stock brokerages. It's basically like watching a really affluent reality TV show where these companies just fight and bicker over who gets a piece of your money—kind of like The Bachelor, except I don't watch The Bachelor.

See, first we had Charles Schwab shaking up the entire industry by announcing $0 stock trades. Then Robinhood fought back with that by offering a cash management account paying 2.05 percent in interest. But Charles Schwab wasn't having any of that, so they did a half-Mayweather on Robinhood and one-upped them by announcing fractional shares. Then it was Robinhood's move to do something revolutionary, never seen before, that would totally destroy Charles Schwab and put them to shame.

But, you know, I actually kind of feel bad here because the Fed lowered interest rates, and Robinhood just sent me this "F's in the chat" to pay your respect. First, you know it's gonna be a disappointing email when the title just reads "Changed to the Cash Management APY." So of course, I had to open it—much like a bad accident you can't look away from—and I wanted to see just how dire this was going to be. So, I went ahead and read it—not read it like the site, and not read it like the color, but more like read, but not that read—like read read with my eyes.

And then my heart sunk, as they were writing to let you know that effective today, the cash management interest rate has been adjusted to 1.8% from 2.05% annual percentage yield. I'm not crying; you know I just got something in my eye. The email also goes further to say that today the Federal Reserve made an announcement that it was decreasing the federal funds rate. The Fed Funds rate influences nearly every financial institution, so a rate change directly impacts the rate we can offer through cash management.

On the bright side, this also means that your rate would go up if the Federal Reserve announces an increase to the rate, right? Is though the Fed going to be raising their rates anytime soon? Am I right? Yeah.

All right, now to be honest, this is something I felt like we could all see coming, and it's not just Robinhood that's affected by this. Let me make this very clear: every single one of your savings accounts is likely going to see an interest rate adjustment over the coming few days, and you're going to see a decrease in what your cash is earning. Unfortunately, though, I felt like this happened at a very delicate time for Robinhood. When them offering a 2.05% interest rate would have given them a pretty clear advantage over many of the other banks, including Ally Bank, which is currently paying a 1.8% interest rate; Goldman Sachs currently paying a 1.9% interest rate; PNC Bank currently paying a 2% interest rate; and Wealthfront coming in at 2.07% interest.

Now, much of Robinhood's advantage is really going to rest on how much lower other banks reduce their interest rates and whether or not Robinhood can still remain competitive by paying 1.8%. But I do have to hand it to Robinhood for being the very first to make this interest rate adjustment before anyone else, and also giving me a very wonderful surprise video for me to film and make on a Thursday morning. They certainly didn't waste any time; they were very quick to react, and I definitely have to respect that.

Though, as for all of the other banks out there, usually expect them to take one to five days to announce their new lower interest rates paid on savings accounts. And this is why all of this is happening: first, interest rates paid by savings accounts are not fixed, and they're going to be fluctuating over time for better or for worse.

Now, here's how this works in very simplistic terms. Banks want you to deposit money with them so that they can turn around and use that money to invest elsewhere. Now, the bank makes a profit on the spread between what they make investing your money and what they pay you back in interest. So if the bank is going and making a 2.5% return but paying you back a 2% interest rate on your savings account, the bank is going to end up making a half a percent by leveraging your money.

Now, in terms of how much money a bank can actually make by investing your money, this is largely influenced by what's called the federal funds rate. This is basically the interest rate that banks pay anytime they want to borrow money from the Federal Reserve. So, in a weird sense, the Federal Reserve is almost like the bank to the banks.

Now, this is really important because the federal funds rate impacts what's known as the Treasury yield, and this is the amount of interest the government will pay you anytime you lend them money, and those returns are largely driven by market supply and demand. Now, if this all sounds like random mumbo-jumbo, here's where all pieces together: when the Fed lowers the federal funds rate, it also inadvertently lowers the Treasury yield, which is where banks largely base their savings account payouts from.

So, basically, when Treasury yields go down, banks won't make as much profit on their money, which means they don't have as much money to pay you in interest on your savings account, which means they have to lower the interest rate on their savings account—if that makes sense. This is why the Fed cutting interest rates doesn't just impact Robinhood, even though they were the first to announce a reduction to their cash account. This impacts every single bank out there, and everyone else is soon to follow.

Now, how much those banks choose to reduce their interest rates on savings accounts will largely depend on how much those banks charge their borrowers, how much cash they have on hand, and how aggressively they want to retain their customer's business. The more they pay, the more likely they are to retain money, but that also means less profit for the bank. This is often why all mine banks can afford to pay you way more money in a savings account because they have less overhead, and that means more money left over to retain you as the customer.

But secondly, in a bigger picture, the Fed reduced interest rates as a potential way to prevent a recession from happening. Let me explain: by going and lowering interest rates, it makes borrowing money that much cheaper. All of a sudden, it costs less money to go and get a mortgage, or for an auto loan, or to borrow money for a business, so that should theoretically entice people to go and spend more money.

I've said this before, but low interest rates really just act like catnip for the entire economy. Because as people start spending more money, businesses tend to do a little bit better as well, which means the stock prices start going up, and the party can just continue really late at night until our neighbors start complaining.

It also does another very interesting thing—and some of this is my own bro theory here, but just hear me out on this. When the Fed lowers interest rates, it starts to make saving money a little bit less appealing because your saved money is now earning a little bit less than it once did. It also means that we're more likely to see higher inflation because more money is flowing into the economy, and that further makes your saved money worth just a little bit less.

This means that all the people sitting on the sidelines holding cash, waiting for the economy to dip in price, will not only now earn less money on that savings but also potentially have that savings eroded away due to inflation, lowering the purchasing power of their money. This would incentivize more people to instead go and invest their money—put it in the markets, put it in stocks—which again would further boost the economy.

Just think about it for a second: if I have a million dollars sitting in a savings account and inflation is rising, and that money is earning less in interest, I'm going to be that much more likely to want to invest it. And that is what I think the Federal Reserve is trying to get people to do.

Third, in terms of what you can actually do about all this, the answer is, well, not really that much—especially since the Fed won't be listening to my YouTube videos about economic theory—but you can do a few things. First, unless you have a lot of money sitting around in cash, then chances are a lower-paying savings account is not going to be that big of a deal. Like, if your interest rate gets reduced from 2.05% all the way down to 1.8%, that only means a loss of $2.08 per month for every $10,000 you have sitting in cash.

So, even on a $100,000 deposit, you're really only losing about $20 a month in interest before taxes. Sure, that also works out to be 104 twenty-cent iced coffees per month, but let's be real—I mean, no one needs 100 iced coffees per month. It's annoying, but it's not that big of a deal.

The second: keeping money just sitting around in a savings account should not be seen as an investment. It seems like every single time I make a video talking about high-interest savings accounts, I get someone complaining that 2% is not a lot of money. "Grand, you lose money with inflation," they say, and then they usually go on to talk about how they make 2% per day with some weird Ponzi scheme I've never heard of, or they tell me to go and buy gold because our entire civilization is about to collapse at any moment.

I have heard it so many times by now. Really, the entire point of a high-interest savings account is just to help retain as much value as possible for money you're either going to be investing in the near future or keeping as your emergency fund. For example, I utilize these high-interest savings accounts anytime I'm saving up to go and buy a new property. That could take me a few months to over a year to find, and in that timeframe, I don't want to risk my money in the stock market where it could lose value in the short term.

That's why I always advocate that people keep their money in a high-interest savings account or a CD if they plan on needing that money in the next two to five years. You may as well not lose any money to inflation, and there's no sense in risking any money in the market in the event it drops in price.

Besides that, I would just carry on as normal and invest with the expectation of holding long term and consider shopping around different banks if you feel like you can get a higher interest rate going elsewhere. Like, I moved a big chunk of my money out of Ally Bank and over to Wealthfront because Wealthfront was paying 15% more in interest than Ally Bank was. And that money really adds up for me. I also opened up an account with PNC Bank, which also pays more interest than Ally Bank, and I'll continue to shop around to find the best interest rate for my money until I find another property to buy, and then I'll go buy that—exactly like the Fed wants me to do.

Speaking objectively, going back to the whole Robinhood thing, we'll see whether or not they're actually watching this. I would have liked to have seen them wait out this announcement a little bit longer, especially because their cash management account isn't even available yet, and then price their interest rate in line with what other banks are offering—plus just a little bit more.

This way, they don't get singled out as the first cash management account to reduce the rate. They could sneak it in and get less notice by doing it at the same time as everyone else, and then they can more competitively price themselves by seeing what other banks are offering first and then pricing their interest rate accordingly.

And again, that might make them just a little bit more attractive. So, with that said, you guys, thank you so much for watching! I really appreciate it. As always, if you have not already destroyed the like button, make sure to destroy it for the YouTube algorithm. Make sure to subscribe and then also hit the notification bell so YouTube notifies you anytime I post a video. Also, feel free to add me on Instagram; I post pretty much daily, so if you want to be a part of it there, feel free to be a part of it.

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Thank you so much again for watching, and until next time!