Average Interest Rates on Savings Accounts
It’s a great idea to save money in an accessible account – for emergencies, short-term goals, and other short-term projects. But while a savings account is secure and accessible, it won’t offer you exorbitant returns.
In fact, the current national average interest rate on savings is just 0.08%, according to the FDIC.
As the Federal Reserve raises federal interest rates, the average rises; it was 0.06% just a few months ago. Yet this average is much closer to what you will earn with a traditional physical bank savings account, which can be as low as 0.01%. If you’re looking to get the highest return on your savings, while maintaining security and flexibility, a high yield savings account can be a much more lucrative option.
Here’s how you can find an above-average savings account rate today, and what to look for when deciding which bank or financial institution to use:
Average Interest Rates on Savings Accounts
Although the national average interest rate on savings accounts is rising – from 0.06% earlier this year to 0.08% currently – it is still well below that offered by high-yield savings accounts.
Some of the best high-yield savings accounts have gone from lows of around 0.5% APY at the start of the year to rates above 1% APY today. This is more than 12 times the national average.
“Interest is the first factor. So if I can get 0.75% versus 0.02%… that’s a massive amount of extra interest the bank is paying you,” says Ayesha Selden, Certified Financial Planner and Franchise Owner of Ameriprise Financial Services. , Inc. in Philadelphia.
Here’s how different interest rates can affect a year of savings:
If you opened a savings account earning 0.08% APY with an initial deposit of $5,000 and made monthly deposits of $200 for a full year, you would only earn a total of $4.88 in interest over 12 months. However, with your contributions, your total balance would increase to $7,404.88 during this period.
Now suppose you started with the same deposit and made the same contributions for 12 months, but in an account earning 1% APY. You will earn $60.98 in interest for a total balance of $7,460.98 at the end of the year.
Ultimately, you’re not going to get rich off the returns of a savings account. But choosing an account with a good interest rate can add more dollars to the bank over time.
Which bank offers the highest interest rates on savings accounts?
To get the highest return on your savings, the best places to look are online banks.
Some of the best savings account rates available today are offered by institutions like Ally, Bask Bank, CIT Bank, and Lending Club, among others. The online divisions of some banks you may be more familiar with, such as Discover or Capital One, also offer competitive high-yield savings accounts.
You may also want to see what local banks in your area or credit unions you qualify for offer. Many local financial institutions offer high-yield savings accounts with competitive rates comparable to online banks.
Here’s a more in-depth look at which banks offer the best savings account rates available today:
Beware of potential fees on savings accounts, such as monthly account maintenance fees and paper statement fees. If your bank charges fees, check your account or the bank’s site to see if you can take steps to eliminate them.
Are interest rates changing for savings accounts?
Interest rates on savings accounts are variable, which means they can and do change over time.
Savings account rates are based on the federal funds rate set by the Federal Reserve, although they are not directly correlated. When the Fed raises rates, interest rates on savings accounts may also rise. But it’s ultimately up to the banks (who have other factors to consider, such as competition and their own reserves) to determine when and by how much to raise rates.
The Fed recently made the biggest rate hike in 28 years, taking rates to a target of 1.5% to 1.75%. Moreover, the Fed has signaled more rate hikes to come in its efforts to fight inflation, so experts predict that the savings rate will continue to rise in turn. In fact, some experts say high-yield savings accounts could return 2% or more by the end of 2022.
Benefits of Online Banking and Credit Union Savings Accounts
The type of banks that currently offer the best returns tend to be online banks and similar financial institutions that conduct most of their business on the web. This is because fully online banks have much lower overhead costs than banks with physical branches, says Ben Arbov, founder and CEO of Greatest Gift, a savings app for kids.
“They don’t need to pay for real estate, furniture, electricity bills or bank staff,” Arbov says. “Instead, they offer their services online and give some of their operational savings to their customers in the form of a higher return on deposits.”
Not only are the returns from online banks and credit unions higher, but they often come with low or no minimum deposit requirements and no monthly fees. Moreover, opening an account with these institutions is usually a breeze: all you have to do is submit an online application with information such as your name, email address, social security number, etc.
You will also typically need to submit routing and account information from another bank account to transfer funds to your new online account.
Online banking may create more barriers to access for some people. You may not have access to an ATM or branch to go to for withdrawals, and instead rely on online transfers between accounts. But Selden sees this as a benefit, saying it can help you stay disciplined in your savings goals.
How to find the most profitable savings account
To find the best online savings accounts, Arbov suggests starting by confirming that the bank has FDIC insurance.
“FDIC insurance means the bank is federally insured and your money is safe with them,” he says. It’s part of what makes a savings account such a safe option for your emergency fund. “If anything happens to the bank, the feds will take care of you up to $250,000 per account.”
You may not know of an online-only bank, but if it’s FDIC-insured, your money is safe.
Beyond insurance, compare the details of each account, starting with the interest rate. NextAdvisor’s list of best savings account rates is a great way to gauge the highest returns available today.
Look for the account with the highest yield and no minimum balance requirement, says Michael Ryan, financial advisor and coach and founder of MichaelRyanMoney.com.
Fees are also an important consideration, although many online high yield savings accounts do not charge for them. Some fees to watch out for include monthly maintenance fees, paper statement fees, inactivity fees, ATM money access fees, and more.
Finally, make sure you know all the requirements you need to meet to get the advertised return on your account. Some banks may offer higher returns only if you maintain a certain minimum balance, for example, or if you also open a checking account with the bank.