PHNjcmlwdCB0eXBlPSJ0ZXh0L2phdmFzY3JpcHQiIHNyYz0iaHR0cHM6Ly9zdGF0aWMubXlmaW5hbmNlLmNvbS93aWRnZXQvbXlGaW5hbmNlX3ZpZXdwb3J0X2RldGVjdGlvbi5qcyIgLz48c2NyaXB0IGFzeW5jIHR5cGU9InRleHQvamF2YXNjcmlwdCI+bXlmaVdhdGNoV2lkZ2V0KCdteWZpV2lkZ2V0XzAnKTs8L3NjcmlwdD4=Lauren Williamson is the Financial and Home Services Editor for the Hearst E-Commerce team. She previously served as Senior Editor at Chicago magazine, where she led coverage of real estate and business, and before that reported on regulatory law and financial reform for a magazine geared toward in-house attorneys. You can reach her at lauren.williamson@hearst.com.Hearst Television participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This may influence which products we write about and where those products appear on the site, but it does not affect our recommendations or advice, which are grounded in research.Mobile app users, click here for the best viewing experience.If you’re like most people, you opened a savings account when you started bringing home regular paychecks, when you started building an emergency fund, or perhaps when you began saving toward some larger goals, like a down payment on a house. But when’s the last time you checked in on how much interest that account earned you each year?Whether it’s inertia, fear of making a mistake, or something else, the vast majority of people leave their money put once they’ve checked “open a savings account” off their to-do list. But that inaction can have huge long-term consequences for your savings.Only one in five Americans currently have money in a high-yield savings account, according to a recent survey by Bankrate. That means a whopping four out of five are leaving money on the table when their savings could be growing at a much greater rate.By Bankrate’s definition, a high-yield savings account is one with an APY greater than 3%. (APY stands for annual percentage yield, which is how much interest the account earns in a year, factoring in compound interest.)Breaking down the numbers further, Bankrate found that 14% of people earn between 3-3.99% APY on their savings, while only 7% of savers earn upwards of 4%. More than half of people, meanwhile, are earning less than 1% interest on their savings — which, on a $1,000 deposit, would be enough at the end of the year to buy themselves a sandwich, maybe.A few years ago, a 4% APY on a savings account would have been unheard of. But thanks to the proliferation of online banks, as well as increased competition among all banks for your business, not to mention the Federal Reserve’s series of aggressive rate hikes, there are now numerous options for maximizing your savings.While moving your money around to different accounts might sound scary, it’s easier than you might think — and a high-yield savings account is one of the safest ways to grow your nest egg. With interest rates the highest they’ve been in years, right now is the perfect time to shop around and make sure your hard-earned cash is working just as hard for you in the bank.How a high-yield savings account worksFor all intents and purposes, a high-yield savings account works the same way as a traditional savings account. You deposit money, the bank keeps it safe, and you can withdraw it when you need it. In the meantime, interest will help it grow.The primary difference is the rate at which your money will grow. The average interest rate on savings accounts for the week of April 19 is 0.24%, according to Bankrate’s weekly survey. Let’s imagine you have $10,000. If you put that in an average savings account and leave it untouched for one year, you’ll end up earning $24 in interest. Now let’s try it with a high-yield savings account. That same $10,000 deposit would earn $412 in interest over a year — money you didn’t have to do anything to earn, other than to move it one time into a better-yielding savings account. There are a few reasons why rates on high-yield savings accounts are skyrocketing. High-yield savings accounts are usually offered by online banks, which don’t have the overhead of brick-and-mortar banks. More generally, deposits at banks have dropped at a record pace this year, leaving financial institutions competing more aggressively than ever for your business. (Banks use the money you deposit to fund loans, and the interest they earn on those loans is where they make most of their money.)Online banks offer some additional advantages beyond better interest rates. They may have lower (or no) minimum balance requirements and fewer, if any, monthly maintenance fees. Money you deposit in an online bank is as safe as it is at a traditional bank, as long as the institution is backed by the Federal Deposit Insurance Corp. The FDIC insures your money up to $250,000 per depositor. (The National Credit Union Administration provides the same protection for credit unions.)On the flip side, your money may be slightly harder to access since online banks don’t typically have any physical locations, nor do they have a wide network of ATMs. However, you can offset some of the inconvenience by maintaining a checking and/or savings account at a traditional bank as well. CDs are also earning excellent interest right nowIf you’re able to leave a portion of your money untouched for a while, certificates of deposit (better known as CDs) are also a fantastic choice at the moment. Interest rates on the highest-yielding CDs are topping out above 5%, the best they’ve been since the mid-2000s. An additional benefit: When you open a CD, you’re locking in the same interest rate for the entire term, which means you’ll continue earning 5% interest even if the market shifts. This could become a con if interest rates continue to rise, but many experts believe that CD rates have peaked. Others recommend a CD ladder — when you open a series of CDs with different maturity dates — to help mitigate some of that risk. (As for the risk of losing money? CDs are just as safe as savings accounts since they’re also FDIC or NCUA insured.)Historically, CDs with longer terms have tended to have the best interest rates. However, these days, savers are getting the best rates on 1-year CDs, which offer a happy medium between CDs that only guarantee a rate for a few months and ones that seal away your money for as long as five years.In most cases, it makes sense to deposit your money in a mix of savings accounts and CDs so that you have some liquid savings, either for an emergency or a shorter-term savings goal, as well as money that’s earning higher interest and helping you reach longer-term goals. Will interest rates on savings accounts keep going up in 2023?The Fed has hiked the federal funds rate nine times since March 2022. Aimed at taming a red hot cycle of inflation, it’s been one of the most aggressive campaigns in Fed history — and it’s been a primary driver of rising interest rates for consumer financial services. The federal funds rate is the target interest rate on money that banks borrow from each other. When it goes up, banks tend to increase interest rates on savings accounts, so there’s a smaller gap between the two. The benchmark borrowing rate now sits at 4.75%-5%. The Federal Reserve is expected to hike interest rates just one more time in this go-around before pausing the campaign. Fed Chair Jerome Powell hinted in March during remarks after the last rate hike that a policy shift could be forthcoming, as tightening credit conditions and shakiness in the banking system following the collapse of Silicon Valley Bank cooled the economy. We’ll find out for sure on May 3 during the next meeting of the Federal Open Market Committee. A quarter point hike, which is what many analysts predict, would bring the benchmark borrowing rate to 5%-5.25%.If this ends up being the final rate hike of this cycle, then interest rates on savings accounts and CDs have likely peaked, though it’s hard to say for sure considering banks are still eager to stanch the outflow of deposits.What it does mean for sure: It’s important to take advantage of the highest interest rates in recent memory now. The sooner you move your money into a high-yield savings account or top-yielding CD, the more time your money will have to grow.Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.
Lauren Williamson is the Financial and Home Services Editor for the Hearst E-Commerce team. She previously served as Senior Editor at Chicago magazine, where she led coverage of real estate and business, and before that reported on regulatory law and financial reform for a magazine geared toward in-house attorneys. You can reach her at lauren.williamson@hearst.com.
Hearst Television participates in various affiliate marketing programs, which means we may get paid commissions on editorially chosen products purchased through our links to retailer sites. This may influence which products we write about and where those products appear on the site, but it does not affect our recommendations or advice, which are grounded in research.
Mobile app users, click here for the best viewing experience.
If you’re like most people, you opened a savings account when you started bringing home regular paychecks, when you started building an emergency fund, or perhaps when you began saving toward some larger goals, like a down payment on a house. But when’s the last time you checked in on how much interest that account earned you each year?
Whether it’s inertia, fear of making a mistake, or something else, the vast majority of people leave their money put once they’ve checked “open a savings account” off their to-do list. But that inaction can have huge long-term consequences for your savings.
Only one in five Americans currently have money in a high-yield savings account, according to a recent survey by Bankrate. That means a whopping four out of five are leaving money on the table when their savings could be growing at a much greater rate.
By Bankrate’s definition, a high-yield savings account is one with an APY greater than 3%. (APY stands for annual percentage yield, which is how much interest the account earns in a year, factoring in compound interest.)
Breaking down the numbers further, Bankrate found that 14% of people earn between 3-3.99% APY on their savings, while only 7% of savers earn upwards of 4%. More than half of people, meanwhile, are earning less than 1% interest on their savings — which, on a $1,000 deposit, would be enough at the end of the year to buy themselves a sandwich, maybe.
A few years ago, a 4% APY on a savings account would have been unheard of. But thanks to the proliferation of online banks, as well as increased competition among all banks for your business, not to mention the Federal Reserve’s series of aggressive rate hikes, there are now numerous options for maximizing your savings.
While moving your money around to different accounts might sound scary, it’s easier than you might think — and a high-yield savings account is one of the safest ways to grow your nest egg. With interest rates the highest they’ve been in years, right now is the perfect time to shop around and make sure your hard-earned cash is working just as hard for you in the bank.
For all intents and purposes, a high-yield savings account works the same way as a traditional savings account. You deposit money, the bank keeps it safe, and you can withdraw it when you need it. In the meantime, interest will help it grow.
The primary difference is the rate at which your money will grow. The average interest rate on savings accounts for the week of April 19 is 0.24%, according to Bankrate’s weekly survey. Let’s imagine you have $10,000. If you put that in an average savings account and leave it untouched for one year, you’ll end up earning $24 in interest.
Now let’s try it with a high-yield savings account. That same $10,000 deposit would earn $412 in interest over a year — money you didn’t have to do anything to earn, other than to move it one time into a better-yielding savings account.
There are a few reasons why rates on high-yield savings accounts are skyrocketing. High-yield savings accounts are usually offered by online banks, which don’t have the overhead of brick-and-mortar banks. More generally, deposits at banks have dropped at a record pace this year, leaving financial institutions competing more aggressively than ever for your business. (Banks use the money you deposit to fund loans, and the interest they earn on those loans is where they make most of their money.)
Online banks offer some additional advantages beyond better interest rates. They may have lower (or no) minimum balance requirements and fewer, if any, monthly maintenance fees. Money you deposit in an online bank is as safe as it is at a traditional bank, as long as the institution is backed by the Federal Deposit Insurance Corp. The FDIC insures your money up to $250,000 per depositor. (The National Credit Union Administration provides the same protection for credit unions.)
On the flip side, your money may be slightly harder to access since online banks don’t typically have any physical locations, nor do they have a wide network of ATMs. However, you can offset some of the inconvenience by maintaining a checking and/or savings account at a traditional bank as well.
If you’re able to leave a portion of your money untouched for a while, certificates of deposit (better known as CDs) are also a fantastic choice at the moment. Interest rates on the highest-yielding CDs are topping out above 5%, the best they’ve been since the mid-2000s.
An additional benefit: When you open a CD, you’re locking in the same interest rate for the entire term, which means you’ll continue earning 5% interest even if the market shifts. This could become a con if interest rates continue to rise, but many experts believe that CD rates have peaked. Others recommend a CD ladder — when you open a series of CDs with different maturity dates — to help mitigate some of that risk. (As for the risk of losing money? CDs are just as safe as savings accounts since they’re also FDIC or NCUA insured.)
Historically, CDs with longer terms have tended to have the best interest rates. However, these days, savers are getting the best rates on 1-year CDs, which offer a happy medium between CDs that only guarantee a rate for a few months and ones that seal away your money for as long as five years.
In most cases, it makes sense to deposit your money in a mix of savings accounts and CDs so that you have some liquid savings, either for an emergency or a shorter-term savings goal, as well as money that’s earning higher interest and helping you reach longer-term goals.
The Fed has hiked the federal funds rate nine times since March 2022. Aimed at taming a red hot cycle of inflation, it’s been one of the most aggressive campaigns in Fed history — and it’s been a primary driver of rising interest rates for consumer financial services.
The federal funds rate is the target interest rate on money that banks borrow from each other. When it goes up, banks tend to increase interest rates on savings accounts, so there’s a smaller gap between the two. The benchmark borrowing rate now sits at 4.75%-5%.
The Federal Reserve is expected to hike interest rates just one more time in this go-around before pausing the campaign. Fed Chair Jerome Powell hinted in March during remarks after the last rate hike that a policy shift could be forthcoming, as tightening credit conditions and shakiness in the banking system following the collapse of Silicon Valley Bank cooled the economy.
We’ll find out for sure on May 3 during the next meeting of the Federal Open Market Committee. A quarter point hike, which is what many analysts predict, would bring the benchmark borrowing rate to 5%-5.25%.
If this ends up being the final rate hike of this cycle, then interest rates on savings accounts and CDs have likely peaked, though it’s hard to say for sure considering banks are still eager to stanch the outflow of deposits.
What it does mean for sure: It’s important to take advantage of the highest interest rates in recent memory now. The sooner you move your money into a high-yield savings account or top-yielding CD, the more time your money will have to grow.
Editorial Disclosure: All articles are prepared by editorial staff and contributors. Opinions expressed therein are solely those of the editorial team and have not been reviewed or approved by any advertiser. The information, including rates and fees, presented in this article is accurate as of the date of the publish. Check the lender’s website for the most current information.
This article was originally published on SFGate.com and reviewed by Lauren Williamson, who serves as Financial and Home Services Editor for the Hearst E-Commerce team. Email her at lauren.williamson@hearst.com.
