Saving money can be challenging, but a high interest rate can boost your savings. Many banks and credit unions are currently offering high returns thanks to the Federal Reserve’s continued high interest rates.
The average savings interest rate has been rising steadily over the past two years. Here’s more about why banks have raised their rates and what average savings interest rates look like today.
What are savings account interest rates?
Savings account interest is what a bank pays you for keeping your money in an account with them. When you keep that money at a credit union, it’s called dividends. When your savings account earns interest, the amount you earn is expressed as an annual percentage rate (APY), which also takes into account compound interest. You add the amount earned to your savings account balance. Your APY varies by institution, but is higher with a high-yield savings account.
Annual Percentage Rate (APR) vs. APY
The APR measures the cost of borrowing money, such as a loan or credit product. This is expressed as an annual interest rate and does not take into account compound interest. The APR is the total interest earned on an account, including compound interest. This is a more accurate measure of what you earn on a deposit account.
Average savings account interest rates
Interest rates have been rising steadily this year. According to the Federal Deposit Insurance Corp. (FDIC), the average savings rate across all financial institutions in 2024 is 0.46%.
This means that if you deposit $10,000 into a savings account, you will have $46 more after one year.
While this may not seem like much, it is important to note that savings accounts now yield much more than they did in previous years. For example, the average savings rate this time two years ago was 0.13%.
Highest savings account interest rates available today
Many banks offer interest rates well above the national average. Some of the best rates can be found on high-yield savings accounts, which currently offer an APR of 5% or more.
Here are some institutions that regularly offer excellent APYs on high-yield savings accounts:
Interest rates for linked checking and savings accounts
While this is not true for all banks, many offer better interest rates if you link a checking and savings account rather than having a separate bank account. Some banks call this “relationship interest” and even extend the increased interest rates to many other deposit products. This is an incentive to have multiple products with the same bank.
Most checking accounts are interest-free, but some banks will charge interest if you link a savings account to it. This is especially true if there are minimum balances or monthly requirements, such as setting up direct deposits or a minimum number of transactions per month.
Savings interest rates at popular national banks
Although popular banks have large advertising budgets, their interest rates are usually no better than those offered by credit unions or online banks. Popular banks tend to offer interest rates around the national average, which is 0.46% as of August 2024. Compared to the rates of over 4.00% or better for online accounts, these are not very competitive.
However, that doesn’t mean it’s not worth considering. These banks usually offer other incentives, such as a huge branch network, longer customer service hours, or even more financial products.
How do banks set their savings account interest rates?
According to Ben Swinney, senior vice president and treasurer of Texas Security Bank, banks set interest rates on deposits – including savings accounts – based on a combination of market rates and competitor benchmarks.
The Fed
One important market interest rate that influences the interest banks pay on deposits is the federal funds rate: “The federal funds rate is the interest rate at which depository institutions such as banks and credit unions lend each other reserve balances overnight,” says Swinney.
The federal funds rate is set by the Federal Open Market Committee (FOMC), a branch of the Fed that meets eight times a year.
“Setting savings account interest rates is a combination of art and science,” says Gene Grant II, CEO and founder of LevelField Financial Services. He explains that in a rising interest rate environment, a bank generally will not raise savings account interest rates in proportion to the Fed’s interest rate increase.
“This is because the bank knows that deposits are generally ‘sticky’ and only a small proportion of customers will switch banks based on deposit rates alone,” says Grant. “The bank performs a calculation to estimate the increase in deposit rates that will cost the bank the least while maintaining an acceptable level of deposit outflow.”
In a falling interest rate environment, interest rates tend to fall much faster, notes Grant.
Competition among financial institutions
Individual banks may also raise or lower their interest rates on savings accounts depending on the amount of deposits they need to fund their loan portfolios. If banks need more deposits, they may raise interest rates to attract more customers.
“A bank that is growing and lending more will tend to raise deposit rates to have the funds to lend. Banks that are reducing their balance sheets tend to pay lower interest rates,” says Grant.
When setting savings account interest rates, banks also consider the spread between the interest they pay on deposits and the interest they receive on loans. To remain profitable, they must strike a balance between competitive interest rates to attract deposits and high enough lending rates to generate income. Therefore, banks may sometimes adjust their savings account interest rates to improve their profit margins.
Current economic situation
Savings account interest rates are directly affected by economic conditions, primarily by the Fed’s actions. When the economy is weak, the Fed may lower interest rates to stimulate growth. Lower interest rates lower borrowing costs, which can encourage spending and investment. However, this also means savings account interest rates will fall, resulting in lower deposit returns.
The opposite is also true. When the Fed raises interest rates, savings account rates usually improve, but higher rates can also slow spending as borrowing becomes more expensive. There are currently rumors that the Fed will begin cutting interest rates in the coming months.
Average savings account interest rates over time
Over the past decade, savings account interest rates have remained relatively stable. After the 2007-2008 financial crisis and the Great Recession, the Fed cut the benchmark interest rate to 0% to make credit more attractive and stimulate economic activity.
Interest rates were lowest between 2013 and 2017, when the average savings rate was 0.6%. In 2018, rates began to rise as the economy continued to recover, only to be brought down again by the COVID-19 pandemic and a resulting sharp (but brief) recession. By 2021, the average savings rate dropped to 0.05%. Things changed in March 2022, when the Fed began raising rates in response to skyrocketing inflation—a side effect of the Fed’s actions. Since then, the Fed has raised rates 11 times. As a result, savings rates rose sharply. Today, the average savings rate is 0.46%.
How to maximize the interest on your savings account
- Choose a high-interest savings account: Not all savings accounts are the same. Despite the relatively low national average interest rates, some savings accounts offer significantly higher returns. With a high-interest savings account, you can earn far more than average and let your savings grow faster.
- Consider a Money Market Account (MMA): The accounts function like a combination of a checking account and a savings account. They pay higher interest than the typical savings account, especially on higher balances. Plus, they often come with debit cards and check-writing capabilities. However, you may need to limit your withdrawals and/or maintain a minimum balance to avoid fees.
- Pay attention to bank bonuses: In addition to low interest rates, some banks also entice new customers with bonuses for opening an account. So if you’re looking for a new savings account, shop around and find out if any banks are currently offering bonuses. Remember, you may have to keep the account open for a certain period of time before you’re eligible for the bonus.
- Consider an online bank: Online financial institutions tend to offer higher interest rates than banks and credit unions with physical branches. Why? Banks with physical branches typically have higher operating costs and therefore typically offer lower interest rates.
- Make sure your money is protected: It’s not worth chasing high interest rates if your money isn’t safe in the event of a bank failure. Always work with banks protected by the FDIC or credit unions backed by the National Credit Union Administration (NCUA). Always keep a maximum of $250,000 on deposit with any financial institution so your funds are fully protected.
The conclusion
It’s important to understand that a savings account is best used for your emergency fund and short-term savings goals. Higher interest rates can help your savings grow even faster, and opting for high-yield accounts at FDIC or NCUA-insured institutions ensures your money is safe.
Still, your savings account should be part of a comprehensive financial plan. In addition to other safe investments like certificates of deposit (CDs) and Treasury bonds, you need to invest your money in riskier (and higher-yielding) market investments like stocks, bonds, and mutual funds to grow your wealth and meet long-term savings goals like retirement.
What is a good savings interest rate?
A good interest rate on a savings account depends on the economic environment and the type of account. A high-yield savings account often has an annual interest rate of 4.00% or more. Standard interest rates on savings accounts currently average 0.46%.
How is the interest rate for a savings account determined?
The interest rate on savings deposits depends on several factors, but is most influenced by the Fed, which sets the benchmark interest rate. Market conditions and the bank’s need to attract deposits also affect interest rates.
Do all banks offer the same savings interest rates?
No, not all banks have the same interest rates on savings accounts. This is because operating costs, profit margins and competition affect a bank’s interest rates. A branch bank has higher overhead costs than an online-only bank, and because credit unions are accountable to their members, not their shareholders, they can often have better interest rates as well.
What alternatives are there if I am dissatisfied with the interest rate on my savings account?
High-yield savings accounts, CDs and MMAs can offer better interest rates than traditional savings accounts. However, each of these accounts has its own rules and requirements. Products with higher yields often carry higher risk.
