Opening a savings account is one of the best ways to start saving money. But not all savings accounts are created equal when it comes to earning interest and maximizing your money. Choosing the right savings account is essential if you want your money to grow.
In this comprehensive guide, we’ll compare the different types of savings accounts, their interest rates, fees, and other factors to determine which options can earn you the most money.
How Do Savings Accounts Earn Interest?
Savings accounts earn interest by lending out the money you deposit to other customers. The bank pays you a portion of the interest they earn on loans in the form of an annual percentage yield (APY).
Banks set their own interest rates based on factors like the Federal Funds Rate and market competition. Rates may be fixed or variable. The higher the interest rate, the more money your deposits can potentially earn.
Useful Information: Common False Statements About Savings Accounts
What Are the Diffe rent Types of Savings Accounts?
There are several commo n types of savings accounts to consider:
Traditional Savings Accounts
These are the most basic savings accounts offered by banks. They typically have low minimum balance requirements and offer easy access to your money. However, traditional savings accounts pay extremely low interest rates—usually around 0.01% to 0.06% APY.
High-Yield Savings Accounts
High-yield savings accounts offer interest rates significantly higher than traditional savings accounts. The national average APY is around 0.50% to 0.60%, but some accounts offer rates as h igh as 2.25% APY or more. They generally have higher minimum balance requirements.
Money Market Accounts
Money market accounts (MMAs) function like savings accounts but may pay slightly higher interest rates than traditional savings accounts. Average MMA rates range from 0.25% to 1% APY. However, MMAs require maintaining significantly higher minimum balances to earn interest.
CDs (Certificates of Deposit)
CDs are savings accounts that earn the most money with its fixed interest rates and terms ranging from 3 months to 5 years. CD rates are generally higher than those of savings accounts, from 0.15% up to 2.50% APY or more. However, you cannot access your money until the CD matures without paying penalties.
Which Savings Account Earns the Most Money?
The account with the potential to earn you the most money is the high-yield savings account. Here’s a comparison of average interest earnings across account types:
- High-yield savings account with a 2.25% APY on a $10,000 balance earns $225 per year.
- Traditional savings account with a 0.04% APY on a $10,000 balance earns $4 per year.
- 1-year CD with a 2.50% APY on a $10,000 deposit earns $250 for that one year.
- Money market account with a 1% APY on a $10,000 balance earns $100 per year.
High-yield savings accounts offer the flexibility of a savings account with interest earnings potential closer to a CD. This makes them ideal for an emergency fund or short-term savings goals.
How To Find the Best High-Yield Savings Accounts
The top high-yield savings accounts offer rates significantly higher than the national average. Here are tips for finding and choosing the best high-yield savings account for your money:
- Compare APYs across multiple banks and credit unions. Online banks tend to offer the highest rates.
- Consider minimum balance requirements. Make sure you can meet the minimum to earn the advertised APY.
- Watch out for excess fees. Low or no fees are ideal for maximizing earnings.
- Look for compounded interest. Accounts that compound daily or monthly earn more over time.
- Check promotional offers. Some accounts offer bonuses for opening a new account.
- Evaluate access needs. Some high-yield accounts limit withdrawals and transfers.
- Read account reviews and ratings. Opt for an established bank with positive feedback.
The best high-yield savings accounts can change frequently as banks compete to offer the top rates. Doing your research is key to find the highest rates and optimize your earnings.
What Interest Rates Can You Expect?
Current high-yield savings average interest rates are around 0.50% to 0.60% APY, but the highest rates offered can be over 2% APY. For example, top accounts today offer:
- UFB Direct Savings – 2.35% APY
- CIT Bank Savings Builder – 2.25% APY
- Capital One 360 Performance Savings – 2.10% APY
- Marcus by Goldman Sachs High Yield Online Savings – 2.10% APY
- Ally Online Savings Account – 2.10% APY
Pay attention to minimum balance requirements, which range from $0 to $25,000 for the highest-yielding accounts. Also note that interest rates are variable and can change at any time.
How Much Interest Can You Really Earn?
The amount of interest you earn depends on your account’s interest rate and your average daily balance. For instance, here’s how much interest you could earn based on current top rates:
Account Balance | 2.35% APY | 2.25% APY | 2.10% APY |
| $5,000 | $117.50 | $112.50 | $105.00 |
| $10,000 | $235.00 | $225.00 | $210.00 |
| $25,000 | $587.50 | $562.50 | $525.00 |
| $50,000 | $1,175.00 | $1,125.00 | $1,050.00 |
Rates and potential earnings are just estimates. But it illustrates how opening a high-yield savings account can maximize your interest earnings versus a traditional savings account.
Who Should Use a High-Yield Savings Account?
Here are some of the best uses for a high-yield savings account:
Emergency Fund
The liquidity and high interest rates of high-yield savings accounts make them ideal for emergency funds. You need quick access to emergency money. Earning interest allows your fund to grow faster over time.
Short-Term Savings Goals
Whether you’re saving for a vacation, down payment, or other short-term goal, a high-yield savings account can help you earn more on those funds compared to a traditional account.
Limit Risks
The FDIC insurance and low risk of high-yield savings accounts provide a safe way to earn interest without exposing your money to market volatility.
Save on Taxes
The interest earned on savings accounts is taxed as ordinary income. But rates are low enough that you likely won’t owe much tax, especially compared to taxable investment accounts.
A high-yield savings account may not be the right choice if you have very long-term savings goals or don’t need quick access to your money. In those cases, CDs, money market accounts, or other investment vehicles may be better options.
Key Factors That Affect Your Potential Earnings
Maximizing your interest earnings on a high-yield savings account depends on several factors:
Interest Rate (APY)
The higher the interest rate, the more you stand to earn, so opting for an account with a top APY is key. Make sure to check whether the rate is fixed or variable.
Minimum Balance
Most high-yield accounts require a minimum deposit to open the account, and a minimum balance to earn the highest APY. Maintain at least the minimum to earn the advertised rate.
Initial Deposit and Ongoing Savings
The more money you can deposit upfront and regularly contribute afterward, the greater your potential interest earnings.
Compounding Frequency
Accounts with daily or monthly compounding earn more over time than quarterly or annual compounding.
Account Fees
Watch out for monthly maintenance fees, overdraft fees, ATM fees, etc. Fees reduce your overall earnings.
Account Longevity
The longer you keep your account open and maintain your balance, the more interest you’ll accrue.
Prioritize accounts with the highest rates, lowest fees, and features that best fit your savings habits and needs.
Frequently Asked Questions
Which bank has the highest interest rates for savings accounts?
The highest rates are currently offered by online banks and credit unions. Some top options include CIT Bank, Marcus by Goldman Sachs, Capital One 360, Ally Bank, and Synchrony Bank. Shop around for the top rates.
Are high-yield savings accounts FDIC insured?
Yes, high-yield savings accounts are insured by the FDIC up to $250,000 per depositor, per account ownership category, per bank. This protects your money in case of bank failure.
How often do high-yield savings account rates change?
Interest rates can change daily but more typically change a few times per year. Rates on high-yield accounts are variable, so they can go up or down depending on market conditions.
