Only several years ago, the interest rate you could expect on your average savings account rested around 0.70%. However, the Federal Reserve’s recent increases to interest rates have caused the APY on savings accounts to jump significantly.
There are many savings accounts on the market now that boast an APY of 1.5% or more, with the highest rates typically found with online-only banks.
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This means if you’ve been using your existing savings account for a few years now, you’ll want to check in on its current APY.
With the nature of savings accounts lending to a “set it and forget it” mantra, it’s likely that many consumers are missing out on the chance to give a serious boost to their investments.
Why Online Banks For High Yield Savings Accounts?
Online banks don’t need to worry about the overhead costs associated with brick-and-mortar banking. These savings are passed along to customers through higher than you’d find with a traditional bank.
The difference in APYs between an online bank and a brick-and-mortar bank is often enormous. Bask Bank, one of the current leaders when it comes to savings account rates, offers an APY of 3.05%. Chase Bank in comparison offers an APY of just 0.01%.
The potential earning difference is vast: Here’s a simple example of the yield on a $10,000 deposit after only one year.
- Bask Bank: $10,000 x 3.05% = $10,305
- Chase Bank: $10,000 x 0.01% = $10,001
Some trade-offs consumers would make in opening a savings account with an online bank is an absence of a physical branch and the in-person customer service that comes with it. Online banks may also offer fewer or more specialized products than a traditional bank.
For example, Bask Bank only offers savings accounts and CDs – consumers who want to do all of their banking in one place will need to look elsewhere. But for many, these limitations are a small compromise for an opportunity at such a large APY.
Savings Accounts Or CDs?
Like savings accounts, CDs are undergoing a similar surge in rates, with the highest rates available from online banks. Though the longer terms carry the highest APYs, even one-year terms carry APYs as high as 2.50% or greater.
Since these rates are locked in for the life of the term, CDs are a popular option for consumers who want to lock in high interest rates when there’s uncertainty if rates will drop in the near future.
However, for many consumers the stringent requirements of a CD – like locking up a deposit for five years – means that CDs are unlikely to replace savings accounts altogether despite the higher APYs.
Access to cash in a savings account is an important benefit, even if there are some restrictions in place around withdrawals. A combination of both products is an ideal approach if a product’s terms and consumer financials are in line.
Why Are Interest Rates Increasing?
Federal Reserve has the most influence on US interest rates. Specifically, they set the base or prime interest rate, a figure used by banks and others as a baseline for product rates.
The Federal Reserve usually adjusts this rate up or down depending on the state of the economy. When the Reserve wants to encourage spending, they lower interest rates so that borrowing is more attractive. And when they want to discourage spending, they increase rates so that borrowing is more risky.
Recent rate increases are an action by the Federal Reserve to reduce spending and ultimately combat inflation. The Reserve is taking an aggressive approach, already increasing the base rate six times since the start of 2022.
The upside to these increases is the rate increases we see in CDs and other types of savings accounts. Consumers can lock in a high rate on their deposit, which creates a win-win for the economy and consumers looking to grow their savings.
High-Yield Savings Accounts Beyond 2022
As high-yield savings accounts are a flexible and simple method of earning interest on a deposit, they’re likely to remain relevant to consumers even as interest ebbs and flows.
Some of the best high-yield savings accounts are light on fees and don’t require minimum deposits as well, leaving consumers with many excellent choices for stashing their money so that it works for them.
About the author
Steven Dashiell is a writer at Finder specializing in all things credit cards. His expertise has been featured on numerous outlets, including U.S. News & World Report, Time, CBS, Fox Business, Lifehacker, Martha Stewart Living and more.
