While on the rise, the national average savings account interest rate is still relatively low and essentially indicative of the lower interest rates offered by traditional brick-and-mortar banks. Most of these large banks offer rates between 0.01% to 1.4%, while in contrast, online banks (as well as newer and less well-known banks) typically offer much higher rates, starting from 1% and ranging above 3%, in order to entice new customers.
It is essential to distinguish the type of savings accounts offered by these two types of banks. Online banks typically offer high-yield savings accounts or money market deposit accounts, while brick-and-mortar banks are more likely to offer traditional savings accounts, usually with similar features and security but considerably lower interest rates.
Online banks usually offer the highest yields on your savings with modest minimum balances or deposits and few or no maintenance fees. These competitive features, among others, allow the newer-age online banks to be more attractive than the long-standing, larger financial institutions. They are able to provide higher yields due to their cost advantage; that is, they do not face the same overhead and operating costs that the traditional banks with only physical formats do. Hence, online savings accounts can provide APYs that are over 10x the average conventional savings account.
Thus, if you were to open a high-yield savings account by making a $10,000 initial deposit at a 1.5% interest rate, you will earn $150 in interest. The interest earned from a high-yield savings account is significantly higher than the interest we calculated above while considering the national average as our APY. This contrast demonstrates the importance of choosing the right bank with a reasonable savings account interest rate. While it may seem that online banks are the obvious choice, several traditional banks, especially those that have adopted hybrid models, do now also offer competitive yields. It’s always important to do your research and review all of your options when finding the best option for your money.