Opening a savings account is one of the first steps to taking charge of your finances. But not all savings accounts are the same. The type you pick can really impact how much you earn over time. In this blog post, we’ll look at different savings accounts, typical interest rates, and fees also guiding you to make an informed decision on the bank accounts for everyday transactions. This will help uncover which options will earn you the least in the long run.
Our insights come from research by EVERFI. They’re a leading company focused on improving financial literacy. According to EVERFI’s 2020 report, 36% of Americans don’t understand basic money concepts. This leads many people to pick bad savings accounts.
By learning what impacts earnings, you will be having a knowledge that “Which Savings Account Will Earn You the Least Money?”. After that you can make smart choices to grow your money faster. Let’s dive in!
Savings Account Basics
A savings account is a bank account that pays you interest on the money you deposit. The main goal of a basic savings account is to set aside cash for short-term goals or surprise expenses.
Savings accounts differ from checking accounts for daily spending. Your money is less handy in savings versus checking. Savings accounts limit monthly withdrawals and transfers. But the trade-off is you earn interest on your balance. It’s essential to be mindful of financial choices, especially about increasing a total loan balance, while saving your all money into a bank.
Understanding Interest Rates
The annual percentage yield (APY) is the interest rate paid on a savings account. The higher the APY, the more interest you earn on your deposits.
Banks set rates based on things like the federal funds rate, competition, and their profits. When the federal funds rate is low, banks offer less high-yield savings options.
For the past decade, interest rates have been fairly low compared to history. In September 2022, the average savings account APY was 0.17%. That means you’d earn 0.17% of your balance in interest per year.
Account Fees Diminish Earnings
Many banks charge monthly maintenance fees on savings accounts. The national average is $5 per month, or $60 per year.
Let’s say you have $1,000 in an account earning 0.17% APY. That $60 yearly fee lowers your earnings from $1.70 to just $1.10. While not a huge deal, fees can really cut into long-term growth, especially on larger balances.
You can dodge fees by picking a fee-free bank or keeping a minimum balance. But minimum balances also have downsides. The key is to understand how fees chip away at interest earned over time.
Minimum Balance Requirements
Minimum balance requirements are amounts you need to keep in your account to avoid fees. For example, a bank may require a $500 minimum balance. If your balance goes below $500, you’ll be charged a monthly fee like $10. These minimums are usually higher at big brick-and-mortar banks, like $500 or more. Online banks often have lower or no minimum balances. The downside is that withdrawing money frequently from an online account can be a hassle compared to visiting a branch. Minimums also make it hard for some lower income folks to open accounts. The key is finding a bank with a minimum you can live with to avoid fees eating into your interest earnings over time.
Types of Savings Accounts
The question is that Which Savings Account Will Earn You the Least Money? There are several different types of savings accounts to choose from:
- Traditional savings accounts – These offer low interest rates but easy access to your money. They are best for short-term savings goals. The average APY is currently 0.09%.
- High-yield savings – Online banks offer rates up to 0.60% APY. But you are limited to 6 withdrawals per month. Good for building an emergency fund.
- Money market accounts – These pay higher rates than traditional savings (around 0.15% APY) and offer check-writing capabilities. But money market accounts come with higher minimum balance requirements.
- Certificates of deposit (CDs) – CDs lock your money up for a set period of time, usually 3 months to 5 years. In exchange, they earn interest rates up to 3.00% APY. The longer the term, the higher the rate.
EVERFI’s Findings on Savings Accounts
According to EVERFI’s 2020 report, 36% of Americans believe all savings accounts offer the same interest rate regardless of the bank. But as we’ve discussed, rates can vary widely across banks and account types.
EVERFI also found that consumers tend to overestimate savings account earnings. 61% of people assume savings accounts will earn 5-10% interest per year. In reality, no savings accounts currently pay rates that high.
These misconceptions lead many to open accounts that earn less than ideal rates. Next, we’ll break down which options pay the least over time.
Saving Account That Earns Least Money
Based on current average rates, traditional savings accounts earn the least out of the major account types. Assuming a $10,000 balance, here’s how much you would earn in interest per year with each option:
- Traditional Savings: $9
- High-Yield Savings: $60
- Money Market Account: $15
- 1-year CD: $200
- 5-year CD: $300
The average 0.09% APY on a traditional savings account generates minimal earnings. You would need to maintain a very large balance to see any significant interest income.
High-yield and money market accounts offer better returns thanks to slightly higher rates. But CDs earn significantly more due to their higher rates and lock-in period.
Economic Factors Impacting Savings Accounts
Federal Reserve policy has a major influence on deposit account rates. Since the 2008 financial crisis, the Fed has kept rates near zero to stimulate the economy. This has suppressed the earnings potential of savings accounts.
Banks can pay less when benchmark rates are lower. And consumer demand goes down, as fewer people shop for yield when rates are depressed across the board.
But the Fed has been rapidly raising rates over the past year, which may boost savings earnings going forward. Competition from fintech newcomers could provide an added nudge upwards.
Strategies to Maximize Savings Account Earnings
Here are some tips to ensure you earn the most on your savings:
- Shop around for the highest rates – Compare APYs across multiple banks, both traditional and online-only.
- Watch out for fees – Prioritize fee-free accounts, or those with no minimum balance.
- Review your account periodically – Request a rate increase or move funds if your bank drops rates.
- Consider CD laddering – Open CDs with staggered maturity dates to take advantage of rising interest rates.
- Maintain a high balance – The more you can deposit upfront, the bigger your interest payments.
Common Savings Account Misconceptions
EVERFI’s survey revealed many misunderstandings about how savings accounts work. Here are some of the myths:
- “You need a minimum of $100 to open a savings account” – Many online banks offer savings accounts with zero minimum deposit.
- “Savings accounts are free” – Monthly maintenance fees are common unless you meet balance minimums.
- “I can earn 5% APY on my savings” – No savings accounts currently pay rates this high. The highest rates from online banks are around 0.60% APY.
- “All savings accounts earn the same low rates” – Interest rates can vary significantly across banks. Take time to find the best APY.
Related: Which Savings Account Will Earn You the Most Money?
The Future of Savings Accounts
Looking ahead, we could see savings account rates rise if the Federal Reserve continues raising interest rates to combat inflation. Higher benchmark rates allow banks to increase the APY on deposits.
Competition from digital-first fintech companies could provide further upward pressure on savings earnings. New players tend to offer high promotional rates to attract customers.
But in the long run, savings accounts may evolve to pay more customized interest based on your banking habits. For instance, you might earn a higher APY by agreeing to limit withdrawals or maintain other account relationships.
Key Takeaways: Choose Your Savings Account Wisely
- Traditional savings accounts pay the lowest average interest rate (0.09% APY) compared to other savings options.
- High-yield online savings and money market accounts offer higher returns than brick-and-mortar banks.
- Minimum balance fees can diminish savings earnings, so prioritize fee-free accounts.
- Regularly review your account APY and bank for the best rates. Consider CDs for higher, fixed returns.
- Misconceptions are common when it comes to savings accounts. Focus on the hard numbers, not assumptions.
Choosing the right savings account takes research. But a little work upfront can earn you exponentially more over the long run thanks to compound interest. Take the time to understand your options and avoid accounts that will minimize your returns and if you are looking for expert ideas and tips on establishing an emergency fund we’d highly encourage you to read the following article. Guide To Establishing an Emergency Fund
Sources:
- EVERFI Financial Literacy Report 2020
- FDIC National Rates and Rate Caps
- Bankrate Savings Account Rate Survey
