• Savings accounts are a safe, non-volatile option for earning interest on your money

• Interest rates on savings accounts can change based on market volatility and several other factors, but some online-only banks will offer more competitive yields

• CDs and Money Market Accounts are just two examples of alternative savings accounts you could opt for once you have done your research

1. Is a savings account an investment vehicle?

2. What is the average savings account interest rate in the US? 

3. Can interest rates on savings accounts change? 

4. Why might interest rates on savings accounts change?

5. Is an online savings account better? 

6. Are there any other types of savings products?    

7. Which bank should you choose?

When considering investing, you may first think only of more high-risk, high-reward vehicles, such as stocks, real estate, private equity, or foreign currency. These instruments often present good long-term returns but also pose some limitations to investors. For example, they may have high-minimum entry requirements, offer low liquidity, or be exposed to frequent fluctuations in value, as is often seen in the stock market today.

At the far end of the investment range lies the savings account. One may even argue that a savings account does not necessarily qualify as an investment. However, a savings account is no different from any other investment. It is a tool that allows you to put aside your money for the future and generate or maintain wealth. A savings account is typically safe from volatility, easily accessible, and does not require a significant initial investment.  Most importantly, a savings account is one of the lowest risk investments you can make where your money is protected up to applicable federal insurance limits per banking institution. Read on to learn more about the average saving account interest rate.

The national average savings account interest rate, on both average and jumbo deposits, has risen from 0.06% at the beginning of 2022 to 0.42% (as of July 2023), according to tracking by the FDIC. Nevertheless, many would consider this higher interest rate still underwhelming — despite it jumping by over 500%!

Here’s an illustration of how those values differ. If you opened a savings account earning a 0.06% annual percentage yield (APY) with an initial deposit of $10,000, your total interest earned in one year would only be about $6. Similarly, if you opened a savings account earning a 0.42% APY with an initial deposit of $10,000, your total interest earned in one year would be $42.

The interest rates offered on savings accounts tend to differ based on location, account balance, bank format, type of savings account, and more. The prevailing market conditions are another major factor. What banks and credit unions are willing to pay for deposits is subject to change and fluctuates according to the federal funds rate, as set by the U.S. Federal Reserve. That is a key distinction between a savings account and a term deposit like a CD, which you can read more about on this page. When you purchase a CD, you lock in the advertised rate for your chosen term, regardless of what may then happen in the market. Savings accounts' rates aren’t typically guaranteed to stay the same.

When the economy is experiencing an economic downturn, the Federal Reserve might lower interest rates to make it easier for the population to borrow and invest. The idea behind lowering the interest rates is to encourage spending that will, in turn, reignite the economy. While such a policy helps borrowers, it does not serve savers very well. Banks benchmark the decreased federal funds rate for savings account yields. Hence, a reduced interest rate means they will likely lower interest on your savings account, and vice versa.

Increased interest rates serve as contractionary mechanisms, in that money becomes more expensive to borrow. A situation like this makes saving more alluring. Banks offer higher savings account yields and thus, provide savers an opportunity to preserve for the future while also maintaining spending power. For this reason, having a savings account is always a wise decision. Nevertheless, the extent of your returns would also depend on your choice of savings account.

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.

In addition to researching different savings accounts and their yields at foreign banks, you may also want to diversify your research and consider other savings products. Several other low-risk saving products provide satisfactory returns. These include:

Money market accounts, or money market deposit accounts (MMDAs), are the closest alternatives to savings accounts. Banks and credit unions offer MMDAs, and they often possess the features of both savings accounts and checking accounts, like debit cards, cheques, and more. When compared to savings accounts, money market accounts tend to offer higher interest rates on average.

For instance, the national average MMDA interest rate as of July 2023 is 0.63%, while the average savings rate is 0.42%. Although the difference does not seem much, the yield gaps between the two accounts get wider when overall interest rates rise, making MMDAs more lucrative.

Nevertheless, money market accounts also pose limitations, such as limited transactions, fee payments, and minimum balance requirements.

Certificates of Deposits are saving products that earn interest on money deposited over a fixed period. They are also offered by banks and credit unions and provide among the highest interest rates of all saving products, including savings and money market accounts. However, CDs require some commitment to a fixed-term without withdrawals and may require high minimum deposits.

There are two types of CDs: fixed-term and no-penalty. With a fixed-term CD, you have to commit to leaving your deposit untouched till its maturity date, so it’s important that you are sure you won’t need access to the funds you are depositing until this point. A fixed-term CD also has a predetermined interest rate and penalties for early withdrawal. On the other hand, with a no-penalty CD, you have more flexibility in being able to access your cash and as the name suggests are not charged a penalty for early withdrawals.

Nevertheless, both types of CDs offer complete clarity on the exact return you will receive at the end of your maturity date, which can give you peace of mind that you know exactly how much you’ll earn, regardless of what happens in the market. They are also very useful when you are on a fixed income or budget and need to know exactly how much you will earn each month over a fixed period of time.

The bank or credit union you choose, and the type of savings account you opt for, depends on a number of factors, including your own personal circumstances and financial goals. As always, it’s important to do your own research and review all your options. You will also want to ensure that any bank or credit union you choose is covered by FDIC or NCUA insurance before opening an account. 

Raisin is an online platform that allows you to compare and choose from among the best, hand-picked deposit products from a nationwide network of banks and credit unions. We offer an easy-to-use marketplace that allows you to build the best saving strategy and manage all of your saving needs through one convenient account. Our platform will enable you to seamlessly monitor and control your financial well-being by sending you just one monthly statement showing balances and earned interest for all the deposits you may be holding.