The average savings interest rate in the US is close to zero. However, some banks are offering 20 times the national average. Here’s the whole picture.
A common question people ask their financial advisors is, “how much interest does a savings account earn?” As of June 2022, the average savings account interest rate in the US is 0.07%, according to Bankrate’s weekly survey of financial service providers. With inflation at 8.6%, you need to do much better to build long-term wealth and create an emergency fund. We explore the different types of savings account interest, their interest rates, and the risks associated with each type of account. Read this before you shop around for the best savings account.
Average Interest Rates for Interest Checking, Savings, and Money Market
If you park your funds in a regular savings account, you may lose your purchasing power due to inflation. Even a 1% extra APY can substantially impact your savings in a few years. You can earn interest on three types of bank accounts; interest checking, savings accounts, and money market accounts.
Interest Checking- You can open an interest checking account for daily transactions and earn monthly interest on the closing balance. Most checking accounts don’t require a minimum balance but pay lower interest than savings or money market accounts.
Savings Accounts- You may open a savings account for everyday transactions or build a short-term emergency fund. You can get a higher interest rate than a checking account but lower than money market accounts.
Money Market Accounts- With a money market account, you can earn a high APY on your savings. However, money market accounts require a minimum balance or deposit amount that is higher than that of savings accounts.
Current Interest Rate on Savings Accounts
|Account Type||Average Interest Rate 2022|
|Interest Checking||0.03% APY|
|Savings Accounts||0.07% APY|
|Money Market Accounts||0.08% APY|
Current Interest Rate on Savings Accounts
Here’s an overview of major banks’ average savings account interest rates in 2022.
|Bank||Minimum Opening Balance||Savings account APY|
|Bank of America||$100||0.01%|
|First Foundation Bank||$1000||1.67%|
|Marcus by Goldman Sachs||$0||0.50%|
|My Banking Direct||$1||1.25%|
APY: Definition, Formula & Example
APY, or annualized percentage yield, is the annual return on an investment compounded over a certain period. It is different from APR, which only accounts for simple interest. Since bank deposits are usually compounded daily on the closing balance, APY is used to calculate the deposit interest rate.
The formula for APY is:
- APY= (1 + r/n )n – 1
Where, r = rate of interest & n = compounding period/year
For example, if a bank offers an interest rate of 1.05%, compounded monthly, then the APY boils down to
- APY = (1 + 1.05/12)12 – 1 = 1.0551%
If the same interest rate of 1.05% is compounded weekly, the APY will become
- APY = (1 + 1.05/52)52 – 1 = 1.0052%
You may notice that APY depends on two variables; the rate and compounding timeframe. The APY increases when banks increase the base interest rate or the compounding timeframe.
Pros & Cons of Using savings accounts
Pros of Using savings accounts
- High Liquidity: You can withdraw your funds anytime from a savings account.
- Earn Interest: You can earn interest on your savings.
- Cash Facility: You can deposit cash into your savings account at any bank branch. You can also withdraw money through a bank teller or an ATM. However, Fed’s Regulation D caps the maximum number of “convenient” transactions to six times a month, beyond which you may need to pay extra.
- FDIC insured- The funds in your savings account are secured up to $250,000 per depositor, bank, and account type.
Cons of Using savings accounts
- Fees: Banks and credit unions may charge account maintenance fees, debit card charges, check charges, etc. on savings accounts.
- Low Interest: Savings accounts usually pay lower interest than CDs, mutual funds, and bonds.
- Fluctuating Interest Rate: Unlike CD or bonds, the interest rate on savings accounts can change drastically depending on market conditions.
- Minimum Balance Requirement: Some banks require you to maintain a minimum balance on your savings account.
- No ATM/Check Facility: Some banks do not allow ATM or check facility with a savings account. You may need to open a checking account for convenient withdrawals.
There are more than 4500 banks and credit unions in the USA, with some offering almost 20 times the average interest rate on savings account. You can diversify your savings and park your funds in some of these high-yield savings schemes. Bank rates also change quickly, so ensure that your bank consistently provides higher than average interest rates on savings accounts. Due to lower overhead costs, online banks can offer higher interest rates and lower fees than brick-and-mortar counterparts. You can choose any FDIC-insured online bank to grow your savings.
If you are earning less than 1% APY as of 2022, you can open a savings account in an online bank or park funds in a money-market account to get a higher return on your deposits. While browsing for savings account interest rates, make sure to read the fine print and check the three minimums; minimum account opening balance, minimum balance to earn APY, and minimum balance to avoid excess fees.