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What Should You Know About Savings Account Interest Rates

March 16, 2022
7
min

Learn how high interest rates on savings accounts can increase the annual percentage yield and help savings grow more efficiently.

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Putting money away in some type of savings account is probably the most consistent financial advice you've heard for most of your life. With uncertainty in the future, a solid savings account—or accounts—can bring you peace of mind.

One critical variable in choosing savings accounts is interest rates. A high interest rate can help your savings grow faster, if you find the type of account that best meets your financial goals.

These days, your money is no longer confined to your local bank's savings rates, as the options for choosing a savings account with online banking are many. Read on to learn more.

Everything you need to know about savings accounts

You have many options available to you when it comes to savings accounts, one being a high-yield savings account. Simply put, high-yield savings accounts are savings accounts that offer higher interest rates than a typical savings account.

You can open a high-yield savings account at a bank or a credit union, either in person or online. Thanks to their higher interest rates, your account will also have a higher annual percentage yield (APY), which will help your savings grow faster.

High-yield savings accounts also come with few fees (or sometimes none at all) if you follow the terms set forth when you open your account, like maintaining a certain minimum balance or opting for paperless statements. A fee may also apply if you make too many withdrawals during a monthly cycle.

Why do investors use savings accounts?

Savings accounts are perfect for putting away money for emergencies, a big purchase like a down payment on a home or car, or simply as a place to keep your money safe and grow it while you do so. Instead of parking your capital in a checking account, which will earn no interest, you can opt for a savings account. If you're unwilling to invest in the stock market, which comes with its own set of risks, a savings account can be an excellent and safe option to grow your wealth.

How does a savings account work?

Ever wondered why banks pay interest to their customers who keep their savings with them? Banks will use savings accounts to fund their loans to other customers. When someone takes out a loan with a bank, they pay interest to the bank. The bank, in turn, takes some of that interest and puts it toward the savings accounts that funded the loans.

Savings accounts are liquid and give you easy access to your money, but they're not intended to be used for daily expenses or purchases, and as such, many don't come with an ATM card or check-writing privileges. You can usually withdraw money from a savings account by moving funds to another linked account or through automatic transfers.

What to consider when opening a savings account

Annual percentage yield


The annual percentage yield tells you what your yearly returns will be, including compounding (the interest your account earns as it grows).

Let's say you deposit $100 in an account with an annual interest rate of 1%. After one year, you'll have $101 in your account. You will then earn 1% interest on $101, so after the second year, you'll have $102.10 and earn interest on that amount moving forward.

Some savings accounts compound daily, while others do so quarterly or yearly. The more frequently an account compounds, the better.

How often do interest rates change?

Interest rates on savings accounts are floating, which means your bank could change them at any time. As incentives to new customers, some banks will offer promotional deals with great interest rates that are only temporary. When establishing interest rates, banks will often follow the lead of the Federal Reserve, which adjusts rates for various economic reasons, such as in March 2020, when the COVID-19 pandemic caused them to drop interest rates to 0%.

Minimum deposit requirement

Sometimes high-yield savings accounts will have a high minimum opening deposit. A high initial deposit will help you grow your savings faster, but some requirements may not be within your budget.

Minimum balance requirement

There could be a fee for not maintaining a minimum monthly balance. Banks often call this a maintenance fee. Knowing your minimum balance requirement is important to consider, depending on how often you plan to withdraw from your account.

Insurance

Most savings accounts are insured for up to $250,000 through the Federal Deposit Insurance Corporation, as long as your bank is an FDIC member. If you open a savings account with a credit union, it will be insured by the National Credit Union Administration. It's crucial to have either FDIC or NCUA insurance in the rare chance your bank fails and cannot return your money.

Fees

Some banks may charge monthly maintenance fees or withdrawal penalties if you don't adhere to the account terms. Read the terms carefully when opening your account so you're not surprised by unexpected fees.

Why is it important to know savings accounts interest rates?

High savings account rates can help your balance grow over time. Let's set up two scenarios. In the first scenario, you deposit $100 in an account with a 0.1% APY, compounding once a year. After a year, without making any withdrawals, you'll have $100.10 in your account.

In the second scenario, your account has a 0.5% APY and compounds once a year, which means after a year, without making any withdrawals, your balance will be $100.50. While it may not seem like a big difference at first, savings are often a long-term strategy that grows over time, and a higher interest rate can add up significantly over the years.

What is the average savings account interest?

According to the FDIC, the current average interest rate for savings accounts is 0.06%. High-yield savings accounts typically have interest rates around 0.5%. The difference between a high-yield savings account interest and the national average can make a noticeable change in your account balance.

What is the difference between online savings accounts and traditional accounts?

When opening either an online savings account or a traditional savings account, you'll need your social security number, address, and government ID. The biggest differences are fees and convenience. Online banking often has no maintenance fees and may have higher APYs, which means opting for an online savings account rather than with your local brick and mortar bank may allow you to avoid service fees and earn higher interest rates. Your money is still insured with high-yield online savings accounts, as long as your online bank is an FDIC member. You can transfer money to an online bank via direct deposits, mobile app check deposits, instant transfers, wire transfers, ATM deposits, or mailing in a check.

Alternatives to savings accounts

Savings accounts are just one of several options you have for meeting your savings goals. Many other account types exist, too.

Money Market Accounts

A money market account is a type of savings account with interest rates that are higher than average. Money market accounts are also more liquid than a typical savings account because they come with a debit card and check-writing privileges. Money market accounts are FDIC-insured and limit you to six monthly withdrawals, just like savings accounts.

Certificate of deposits (CDs)

CD rates are typically higher than banking rates, but you are restricted to the CD's term, meaning you can't access your money for a predetermined amount of time. This period can be as short as a month or last for years. If you want to make an early withdrawal, you will not receive the total expected value because you will most likely have to pay withdrawal penalties.

Checking accounts

A checking account does not earn interest, but you have no withdrawal restrictions. In most cases, you can use an ATM card and write checks as frequently as you wish. Because checking accounts accrue no interest, they are typically used for day-to-day expenses, not long-term savings.

The bottom line

Savings accounts are a risk-free way to put away a nest egg and earn some interest on your account over time. Some high-yield accounts offer interest rates well above the national average to help grow your savings. Savers have many options available, and finding the best savings accounts for your financial goals is possible.

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