Are you wasting money in your savings account?
Yes, you should absolutely be saving. But it's possible you're doing it wrong.
“I keep hearing about high interest rates on savings accounts. Is that really a thing?”
Important note: this information focuses on the American banking system.
Quick Answer
Oh dear goodness, yes, it’s a thing! It’s not going to make you rich, but why not have your money sitting in a savings account that gives you a little something-something?
Let’s say you have $5,000 in savings at a bank that offers 0.01% APY (annual percentage yield). At the end of a year, you’ll have earned $0.50 in interest. Now, if that same $5,000 was earning 3.40% APY, you’d have $170 in interest at the end of a year.
If you have money still in a savings account that’s earning less than 3% APY*, then frankly, you’re doing it wrong!
Let’s put it this way, if your savings is in an account with Bank of America, Wells Fargo, Citi (unless it’s the Accelerate account, but you still have to jump through hoops) or Chase, then you need to shop around.
These banks are far from being the only offenders of low interest rates, so do your due diligence and look up the APY on your savings account.
While we’re at it, you should not be paying a monthly fee for a savings account (or a checking account)! Read this newsletter about “Is your bank screwing you?” for more.
*Based on rates as of February 1, 2023. They may be even higher (or lower) at time of reading.
Detailed Answer
Yesterday, I got an email from Ally (not an ad and no commissions earned) saying, “Your Online Savings Account rate is increasing from 3.30% to 3.40% Annual Percentage Yield (APY) on all balance tiers.” This is the highest rate I’ve ever experienced in my near decade of using an Internet-only savings account.
I won’t get into the weeds about why savings rates are going up so high, but it’s tied to the Fed’s benchmark rate. It’s more expensive to borrow money as the benchmark rate goes up (e.g. expensive mortgage rates), but interest rates on savings accounts often go up to encourage saving. A couple of years ago when rates to borrow money were so low, so too were savings accounts rates (e.g. 0.50% APY).
High Yield Savings Accounts are often offered by Internet-only banks (sometimes called Online Banks), but not exclusively. A few current players include: Ally, Marcus by Goldman Sachs, Synchrony, Varo, SoFi, UFB Direct, Capital One 360, CIT Bank, Discover Online Savings, AMEX Savings, Betterment Cash Management Account, and PenFed Credit Union (it’s 2.70% APY, but if you want to do a credit union, it’s highly competitive).
Before you make the leap to a high interest savings account, there are a few factors to consider.
Make sure any bank with which you do business is FDIC insured. Aka if something were to happen to that bank, your checking and savings accounts are covered up to $250,000. FDIC insurance does not apply to investments.
You need to see if there are any hoops you need to jump through in order to get the high yield APY. Do you need to have a minimum balance to take advantage of the high interest rate? Are there fees associated with the account? You can find high yield savings account options without hoops.
How is customer service? Is it easy to get a hold of someone? Are there multiple ways to get in touch like via chat, phone, or email? Take customer service out for a test run before you commit.
Do you feel good about doing business with that institution? The ethics of banks is a complicated conversation and everyone will come up with their own litmus test about whether or not they want to do business with a particular institution.
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Grateful for this, switching to a bank with better interest is one of my new years resolutions haha.