Why Some Banks Pay More Interest Than Others
Interest rates on savings accounts have become more competitive in recent years, but you may not notice if you bank with an older institution that has many physical branches but few online offerings.
Online banks are leading the charge by offering high annual percentage yields (APYs) on accounts to attract customers. Here’s why, and how you can benefit.
HYSA change
Online banks can offer higher interest rates than many traditional banks because they have fewer overhead costs, such as the cost of hiring staff and operating a physical branch. While many traditional banks have also raised their rates, those rates often lag behind those of the best online banks.
While savings accounts often come with higher interest rates than checking accounts, they often pay no interest at all, and those savings rates can be as low as 0.01%. Enter high-yield savings accounts (HYSAs), which are what banks and credit unions call their accounts that offer significantly more interest on savings. Some HYSAs offer 4% APY or more.
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When it comes to banking, loyalty often doesn’t pay off. Finding a competitive savings account can bring in hundreds of extra dollars each year. For example, keeping $10,000 in a savings account with a 0.01% APY or a HYSA with a 4% APY would result in an annual profit of $1 or $400. Add the fact that inflation erodes our savings over time and you can see why HYSAs offer greater returns than traditional savings accounts.
However, it’s important to remember that interest rates vary, meaning that banks and credit unions can change them at any time. Financial institutions often take guidance from the Federal Reserve, so when the Fed lowers interest rates, interest rates on savings accounts may also decrease.
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How to use HYSAs
Financial advisors often recommend keeping enough money in an emergency savings account in case the unexpected happens — like losing your job — to cover your expenses for three to six months. HYSA is a great place to keep this safety net, because it allows you to access your funds quickly but your money continues to grow.
Retirees may want to invest in HYSAs by putting enough money into them to cover their expenses for one to three years, as they may need more money due to retirement. And HYSAs can be a great place for anyone to save for short-term goals, like a new car or a vacation, since you don’t want to risk losing that money in the stock market during near-term volatility.
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How to evaluate your savings options
If you’re looking to open a new savings account, do your research as terms and conditions can make one more attractive than another. For example, some online banks offer their highest advertised APY for only a portion of the balance. To find the best HYSAs, consider minimum opening deposits, minimum balances required to get the advertised APY and fees.
For some people, a certificate of deposit (CD) or money market account may make more sense. CDs tend to have high interest rates and allow you to lock in that rate for a certain period of time, but you usually can’t withdraw money from that account without incurring a penalty. These accounts only make sense for keeping money that you won’t need until the end of the term, which usually ranges from three months to five years. Money market accounts often offer checking-like capabilities, including checking and debit cards.
