When you stash money in your bank account, you get a risk-free interest rate. While you can make higher returns with stocks and real estate, this return is far less stressful. Investments can lose value, but bank accounts with interest keep their nominal value and grow over time.
A higher interest rate lets you earn more on your money, but some banks have higher rates than others. Checking the average interest rate before creating a bank account can help you earn more money over time. The average interest rate on a savings account represents the average returns users receive on funds in their savings accounts. The account interest rate is a useful number but shouldn’t be the only part of your research when comparing traditional banks, credit unions and online banks.
Interest Rates on Savings Accounts: The Basics
You work hard for your money, and it only makes sense for your money to work hard for you. Some people overlook investing, but savings accounts with high interest rates make it easier to build wealth. You can put a portion of your hard-earned money in a savings account to grow it without having to put forth any effort. You don’t have to manage assets and stay on top of the news to earn a positive return from your bank account.
It’s vital to narrow down your shortlist of options to financial institutions that provide fee-free savings accounts without stringent minimum balance requirements or any other red tape. Brick-and-mortar banks are popular due to their long histories, but you may find online savings accounts with better rates and features. For example, a higher annual percentage yield (APY) means you get more mileage out of your money. You can also get an APY on checking accounts, but savings accounts usually have higher interest rates.
How Interest Rates on Savings Accounts are Determined
Interest rates grow your savings account automatically, but how do those rates get determined? Understanding what influences the savings account interest rate can guide your decision-making. If you believe interest rates may decrease in the future, it may make sense to lock up money in a certificate of deposit. However, if you believe interest rates will rise in the future, locking up a long-term CD may not be the best idea. Traditional banks, credit unions and online banks consider a few factors when setting interest rates on savings accounts.
Supply and Demand
Banks use supply and demand to set the interest rate on savings accounts. If they want to raise more funds, the interest rate will go up to attract more customers and cash deposits. The higher interest rate incentivizes more consumers to stash their money in a savings account instead of investments or personal purchases. However, the interest rate offered on savings accounts and investment products should be lower than what customers pay for loan products. For instance, if mortgage interest rates are at 6%, you shouldn’t expect to find a savings account with a 6% APY.
Government Influence
The federal government also heavily influences interest rates offered on savings accounts. For example, many banks and credit unions invest in U.S. Treasuries to grow their assets. If there’s a surplus, the yields or returns are generally lower, prompting a drop in interest rate. However, as the rate of return increases, so will the interest rates offered on savings accounts. The Federal Reserve plays a significant role in U.S. Treasury investments and can raise or lower interest rates at any time. As a result, changes made by the Federal Reserve will impact savings account interest rates.
Average Interest Rates on Savings Accounts
According to the FDIC, the average savings rate on April 17, 2023, was 0.39% APY. This isn’t the best return on your investment and won’t do much to counter inflation. For example, if you invest $10,000 into a savings account with a 0.39% APY, you only end up with a $39 interest payment. It’s better than nothing, but if you got a 4% APY on the same cash, you would end up with $400.
Other Things You Should Consider When Opening a Savings Account
Primary Purpose
You should establish a purpose for each bank account before you open it. Some people have multiple savings and checking accounts for specific goals. Savings accounts are usually for long-term goals, such as an emergency fund, vacation planning, down payment, or another multiyear commitment. Checking accounts are better for covering everyday expenses and paying off credit card debt.
Your Savings Goals
Consumers should consider their savings account goals and how long they can keep the funds untouched. A good goal for an emergency fund is to cover at least six months of expenses. If you spend $5,000 per month, you should aim for a $30,000 emergency fund. Some people aim for a 12-18 month emergency fund instead, but it is a good idea to start with small milestones and build on that foundation.
Fees and Other Costs
Some banks offer great savings rates that get overshadowed by excessive fees and other expenses. A high penalty for withdrawing funds too early may eliminate the gains from a high APY. You should also check if the bank has a monthly maintenance fee. This recurring expense will minimize the net gain from your savings account.
Minimum Deposit
Not every bank has a minimum deposit requirement, meaning you can get started with as little as $1. However, some banks set minimum deposits for their savings account. As a result, you may have to set aside hundreds of dollars to open a savings account and receive interest. Some banks may even require thousands of dollars to open an account. Therefore, you should consider how much funds you can set aside for the minimum deposit requirement. The minimum deposit requirement is more common with traditional banks than online banks.
Withdrawal Limits
Most banks let you make six withdrawals per month from your savings account. This limit is based on Regulation D, a rule the Federal Reserve created to limit withdrawals. However, this regulation was suspended indefinitely in October 2022, which means the limit isn’t imposed by the government. So, if you need to make more than six withdrawals each month, you may want to look for a bank that has updated its withdrawal limit based on Regulation D’s suspension.
Consumers who cannot find a bank with a suitable or nonexistent withdrawal limit should consider putting some of their funds into a checking account. These accounts have lower interest rates but do not have any withdrawal limits. You can use short-term funds in your checking account and put money in your savings account that you will not need for several months or years.
Other Bank Features
A bank account is more than a place to put your money and let it grow over time. Many financial institutions and online banks have features that can strengthen your finances. It’s common to find budgeting tools and financial products that help you earn more money. In addition, most banks offer mobile banking, which makes your accounts more accessible. You can take a picture of your check and have the funds automatically go to your savings account instead of paying a visit to your local bank.
While banks have many features, it’s also important to consider which ones you need. Some people prefer physical branches, but online banks tend to have higher interest rates than their physical counterparts. Consumers should check a bank’s reviews and hours of operation before opening a savings account. It takes a little extra time to know what you want from a bank, but the extra research can lead you to the perfect bank for your finances.
