Savings accounts help you grow your savings, but how do you find the best savings rates? Every bank pays a different rate, and your interest earnings affect how quickly your account grows. The tips below help you find the right account as well as understand why the rate is so important.
The chart below illustrates savings account interest rates from the year 2009 through today.
Know What’s Competitive
How much should you earn on your savings? There’s a wide discrepancy between how much certain banks pay.
Average vs. competitive
The FDIC survey of 43,000 banks reports that the average rate is roughly 0.05 percent APY, but that’s hardly competitive. Some online banks, like MySavingsDirect, pay as much as .30 percent with no minimum balance requirement. Many others pay more than the FDIC-listed average.
With a feel for the high and low-end of rates, you can find the best account by comparing banks that do what you need. You don’t necessarily have to earn the best savings rates in the nation — rates change regularly, and a slightly higher rate might make little difference unless you have significant assets, but it’s nice to earn a competitive rate.
Go Online, Local, or Small
Large national banks typically don’t have the best savings account rates, but you have plenty of other options.
The highest rates are typically available at online-only banks. Those institutions compete on rates and technology, and they don’t have the overhead of national branch networks. You usually pay no monthly fees, and you may be able to open an account with as little as $1. Because there are no branches, you may need to plan your spending, but it’s easy to move money between banks. Plus, online banks typically provide online bill payment and debit cards, which may work for most of your expenses.
Credit unions and regional banks often have competitive rates, and they may also be convenient for in-person banking needs. To find the best rates, look for local advertisements in print and online publications. Banks occasionally announce “specials” that are only available if you open an account in person. As a bonus, local banks are a vital part of your community.
Megabanks might not pay much on your savings, but small institutions are more likely to compete for your business. Again, the best way to find out about rates is to check local publications or signage at a branch. If you’re concerned about services and geographical reach, don’t be. Small institutions can offer most (if not all) the services you need, and they’re a good source for free checking accounts. In fact, credit union members typically have access to the nation’s second-largest branch and ATM network through shared branches.
At some banks, you can qualify for the best savings account rates simply by depositing more. For example, Incredible Bank requires a minimum of $50 to open an account and pays 0.03 percent on balances below $10,000. But if you deposit more than $10,000, you can earn 0.15 percent APY. Those tiers may entice you to transfer funds from other accounts or to shift funds from your checking account, which probably doesn’t pay interest.
Consider Other Options
Another way to earn more interest is to broaden your search. A savings account might not be the best place to keep your cash.
Certificates of deposit (CDs)
If you’re willing to lock up your money for at least six months or one year, a CD may return more than a savings account. Not all CDs require a commitment, but you typically earn more by promising to leave funds untouched. To reduce the chance of penalties for cashing out early, try a CD ladder, which ensures that you regularly have funds available.
Money market accounts
If you want to keep your money accessible, a money market account may be an excellent option. Those accounts typically pay higher rates than savings accounts, and they allow you to spend money with a debit card or checkbook. You can only spend from the account six or fewer times per month, but that may be all you need for emergency savings or periodic expenses.
Calculate Your Earnings
Before you get too hung up on finding the best savings rates, determine how much you gain by earning more. With relatively small balances, a higher interest rate might not make a meaningful difference.
Example: Assume you keep $2,500 in your savings account. That’s a healthy balance, and you deserve to earn a competitive rate. After one year, how much will you earn in interest if your bank compounds interest monthly?
- At 0.09 percent, you’d earn $2.25
- At 0.50 percent, you’d earn $12.53
- At 1.00 percent, you’d earn $25.11
- At 2.25 percent, you’d earn $56.83
At what point does it make sense for you to move your account for a higher rate. Moving from 0.09 percent to 1 percent makes a difference of roughly $22. To earn that, you need to open a new account, you may need to switch banks, and the bank might pull your credit. For some people, it may be worth $22. For others, it’s not.
The additional earnings get more impressive with the following changes:
- Your account balance increases
- The length of time increases
- The difference between interest rates increases
To calculate for yourself, use a compound interest calculator with your financial details. Determine whether or not it makes sense to open a new account and move your savings.