When searching for a good interest rate for a savings account today, you’re lucky if you find a rate close to or over 1%. To snag the best possible rate, you will probably be banking at an online bank. These financial institutions, which don’t have bricks-and-mortar branches, tend to pay more than traditional banks. They save money by being virtual and pass the savings on to their clients.
Interest rates do fluctuate, but here we’ll take a look at the latest numbers in terms of savings account interest rates and how your money can grow faster. We’ll cover:
• How interest rate works
• What the national average for savings account interest rates is
• How to earn higher interest
• How to open a savings account that will earn high interest
How Interest Rate Works
Interest is a small fee paid for the privilege of borrowing money. Interest can be charged against credit cards, loans, and other types of financial products. In the case of savings accounts, you earn interest for lending your money to the bank or financial institution. Typically, savings accounts contain money that you aren’t planning to use right away to pay bills. Why people open a savings account is a very variable matter: It might be to have money set aside for a rainy day, to grow towards a down payment on a house, or to finance an upcoming vacation.
The interest rate determines how much you’ll earn for keeping money in a savings account, which the bank can then use. For instance, say you have a savings account that earns simple interest, paid annually. In this case, if you have $1,000 and earn 1% interest, you would have $1,010 at the end of the first year. You would then have $1,020 after the second year, $1,030 after the third year, and so on.
But there are different ways interest is compounded. Savings accounts usually pay compound interest. With compound interest, you earn interest on the entire balance, including previous interest payments. Using our previous example, your compound interest would accrue like this:
$1,000 * 1.01 = $1,010
$1,010 * 1.01 = $1,020.10
$1,020 * 1.01 = $1,030.30
As you can see, with compound interest, you earn interest on top of the interest that was already paid. However, in the real world, the way savings accounts earn interest is slightly more complicated. The timing at which the interest can vary. Some banks may compound interest daily and pay out monthly. As a result, each interest payment will be a fraction of the annual percentage yield (APY). However, the money continues to compound daily, allowing it to grow more quickly the longer you keep it in your account.
Since interest rates are low overall right now, it may feel as if your savings won’t be growing much. But consider this: An interest rate of 1%, compounded daily for 10 years, will add more than 10% to your initial investment’s value.
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What Is the National Average for Savings Account Interest Rates?
The most recent national savings account is 0.06% on average, according to the FDIC . That rate comes in at double the rate for interest checking, which has an average rate of 0.03%. Money market accounts fare slightly better with a rate of 0.08%. If you’re wondering, “Is that a good interest rate for a savings account,” you need to remember the context. Interest rates have been and could be much higher, but right now, this is where the range of rates is. Your best bet is probably to find a savings account that pays as high of a rate as possible while delivering the features that are most important to you.
Keep in mind that the national average savings account rate is just that — a national average that includes all banks insured by the FDIC. Perhaps more importantly, the average is weighted by each bank’s share of domestic deposits. This matters because some of the country’s largest banks have savings account rates that are even lower than the current national average.
It’s also important to note that savings account interest rates usually rise and fall with rates set by the Federal Reserve. When the Fed slashes interest rates, APYs on savings accounts fall. When the Fed raises interest rates, savings accounts have higher yields.
Regardless of the Fed’s interest rates, traditional savings accounts usually don’t pay much interest. However, there are ways to find a better return on investment, which we’ll cover in the next section.
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Is There a Way to Earn a Higher Savings Account Interest Rate?
There are two basic ways to earn a higher savings rate: with a high-yield savings account or by linking your checking and savings accounts. We’ll cover each of those in more detail.
High-yield Savings Accounts
High-yield savings accounts offer interest rates many times higher than the national average. These accounts are usually only available at online banks, meaning they have no brick-and-mortar locations. In addition, they tend to offer a fairly basic set of services; you may not be able to deposit cash in high-yield savings accounts. In many cases, you can only deposit money by electronic bank transfer. But the benefit of these types of high-interest accounts for savings is obvious: You can earn close to or even over 1% APY on your money, which given the current averages, is a good rate for a savings account.
Another limitation to these accounts may be a federal regulation that limits you to six monthly withdrawals. However, this guideline can apply to all savings accounts, and it has been suspended in recent years by some banks. Inquire at your bank to know their policy. Checking accounts have no such limitation.
Money held in a high-yield savings account is usually FDIC-insured, meaning your money is protected in the rare event of a bank failure up to $250,000 per depositor and per account category. This makes them a good place to set aside extra cash for an emergency fund or to meet short-term savings goals.
If you have a checking account at a traditional brick-and-mortar bank, you might be able to increase your interest rate by opening a savings account at the same institution. Some banks will offer a higher interest rate if you have both a checking and a savings account with them and link the two.
Although savings rates on linked accounts are higher, everything is relative. Opening a linked account might allow you to increase your APY from 0.01% to 0.02%. Banks might also increase the rate a bit more with higher account balances.
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Alternatives to Savings Accounts
Savings accounts are a popular way to set aside money for a savings goal, to earn some extra interest, or both. But there are a few different financial vehicles that can help you achieve your goals.
Certificates of deposit (CDs) are savings accounts that hold a certain amount of money for a set period of time, such as six months or five years. In general, the longer the period, the higher the interest rate. Most major banks offer these accounts. When you redeem a CD (also known as when a CD matures), you receive the money you deposited plus interest. Or you can reinvest it in a new CD. Like savings accounts, CDs are FDIC-insured for up to $250,000. It’s worth noting that most CDs will penalize you if you withdraw the funds before the agreed-upon time period ends. You might lose some or all of the interest earned to that date, and possibly even a bit of the principal.
Government Savings Bonds
Government savings bonds are similar to CDs, but you open them with the government instead of a bank. For example, Series I savings bonds, issued by TreasuryDirect , offer attractive interest rates, currently 9.62% at press time. Series I bonds can be held and continue earning interest for up to 30 years but you can redeem a bond sooner. However, you must hold them for at least five years. If you cash them sooner, you forfeit interest from the previous three months.
Money Market Accounts
Money market accounts are similar to savings accounts, and many banks offer them. They, too, earn interest while possibly being limited to six withdrawals per month. However, withdrawals by ATM do not count against that limit. These accounts may have a higher initial deposit or balance requirements than savings accounts (in some cases, up to six figures). However, they do come with higher returns, though currently the range is to a large extent under 1% APY. Note that money market accounts are different from money market funds, which are accounts you can open with investment firms.
How to Open a High Interest Savings Account
If you have internet access, opening a high-interest savings account should be a simple process. Because these accounts are generally offered online, opening an account is as easy as visiting the institution’s website.
From there, you can open a savings account online; the entire process should only take perhaps 10 minutes. To complete the application, be prepared with the appropriate documents, such as your Social Security number and driver’s license. You will also want to have your bank account number and routing number in order to link your checking account. This will allow you to transfer money between your checking account and your savings account.
Interest rates work by paying you for keeping your money in an account with a financial institution. While traditional banks pay interest on their savings accounts, they can be quite low compared to savings vehicles like high-yield savings accounts offered by online banks, CDs and money market accounts. By taking a little time to shop around and find the right fit, you should be able to find the right savings vehicle to help you stash cash for emergencies or a future goal…and earn money while doing so.
One great option to consider comes from SoFi: Our Checking and Savings linked accounts offer a competitive APY when you sign up with direct deposit. And we charge no monthly, minimum balance, or overdraft fees. These accounts are a great way to help your money grow faster.
What is the average interest rate for a savings account?
According to the FDIC, the current national average interest rate for savings accounts is 0.06%.
What is considered a high-interest savings account?
High-interest savings accounts are usually offered exclusively online and offer interest rates many times the national average. These accounts may have a limited scope of services, such as not offering ATM cards or cash deposits.
Is 1% a good interest rate?
In general, 1% is likely to be much higher than the interest rates offered by traditional banks at any given time. However, interest rates are based on the rates set by the Fed. In 2019, for instance, some online banks offered interest rates above 2%. However, many online banks currently have rates under 1%.
How much interest does $10,000 earn a year?
How much interest $10,000 earns in a year will vary on several factors, such as the interest rate and how often interest is compounded. If we assume a 1% interest rate, $10,000 compounded annually earns $100 in interest. Compounded daily, the same interest rate earns $100.50 in a year.
SoFi members with direct deposit can earn up to 3.25% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 2.50% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 11/3/2022. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet
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