A high-interest savings account isn't out of reach: What to know

Once upon a time, banks rewarded customers who opened savings accounts with stuffed lions, duffel bags, and interest. Lots of it.

Those days have passed. The average savings account now yields About 0.45 percent Annual interest, according to the Federal Deposit Insurance Corporation (FDIC). Interest rates remain stubbornly low for savers even as banks charge ever higher interest rates to borrowers: the prime lending rate – the interest banks charge their most creditworthy customers – It is 8.5 percentThis is its highest mark in two decades.

As a rule, interest rates on savings accounts rise and fall with the prime interest rate. The more banks earn from borrowers, the more they can reward depositors. When the Fed raises interest rates, banks tend to respond By paying more interest on “high-yield” savings accounts..

But this system has collapsed in the past eighteen months. The Federal Reserve raised the federal funds rate from virtually zero to more than 5%, its highest level in two decades. The banks did not follow suit.

“The banks haven’t kept up,” said Jeff Farrar, a certified financial planner and managing director of Procyon Partners in Connecticut.

Why not try to attract new customers and their money?

Because the big banks are full of deposits. This is partly due to the pandemic and the federal stimulus campaign, which encouraged the nation to save. It is partly consumer inertia. Bank customers trust big brands and tend to stay where they are.

Customers do not change savings accounts

“We found that on average, Americans have had the same checking account for 17 years,” said Ted Rossman, senior industry analyst at Bankrate. “The banks know this very well. It is a very ‘sticky’ business.”

Big banks, such as Capital One, Bank of America and Citibank, “don’t compete on interest rates,” Rossman said. “They compete in national ad campaigns. They put their names out On the playgrounds“.

And in a 2023 survey of 3,674 adults, Bankrate found just that One in five savers He said the interest rate is 3% or higher. “And 3% is too low.”

Savers can do better, he said. The current market offers several ways for people to save their money and earn 4% or even 5% interest. That’s an extra $400 or $500 per year on a $10,000 deposit.

Some options allow investors the freedom to withdraw funds as they wish, just like a regular checking account. Others require that funds be left untouched for a few months or a year.

“We’re talking about the best savings rates we’ve seen in a long time,” Rossman said. “A lot of people could do much better.”

Older Americans remember when banks competed for their savings, offering serious bonuses, perks and interest. Interest rates on regular savings accounts reached 8% In the Reagan 1980s when the key interest rate rose to double digits.

By contrast, since the Great Recession, savings accounts have returned less than 1% annually on average. These rates reflect the federal funds rate, which was… Virtually zero For many of the past 15 years.

Repercussions of the SVB banking crisis: Banks may raise savings rates to retain customers

This fact may partly explain why many people do not save much in banks. The average American family is just held together $5300 In checking, savings, and money market savings in 2019, according to the latest data from the Federal Survey of Consumer Finances.

So here’s the good news: higher interest rates are just a few clicks away.

Find the best high-yield savings accounts

A quick online search will turn up dozens of offers for bank savings accounts that pay 4% to 5% annual interest. Rise of the Motley Fool And WalletHubamong other things, offering regular tours.

Many offers come from not quite famous banks: UFB. Direct valley. Basque.

“Most people haven’t heard of this stuff,” Rossman said. “But that’s OK, because they’re all FDIC insured.”

The Federal Reserve covers up to $250,000 per depositor per bank. As long as the presenting bank has the backing of the Federal Deposit Insurance Corporation (FDIC), experts say, it should be a safe home for your money.

Many high-yield accounts are found at online-only banks. There is no way to drive to a branch and meet a teller.

If you hate change, consider keeping the checking account you’ve had for 17 years and opening a new high-yield savings account.

“You can open one of these accounts, seriously, in just a few minutes online,” Rossman said.

There are many other options.

Money market accounts

One is Calculate the mark in cash. They are offered by banks and credit unions with support from the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration. They’re generally not as flexible as savings accounts: you may not be able to move money in and out as easily.

Money market accounts were moribund during the low-interest years, but not today. Competitive prices up to Range 4% to 5%.

“It’s a step above a savings account,” said Ed Snyder, a financial advisor in Carmel, Indiana. “It is still very liquid,” meaning the money can be easily converted into cash.

Check out the best CD prices

Savers who do not expect to withdraw their money in the near future may consider this Certificates of deposit. Banks offer CDs at relatively attractive rates, backed by the Federal Deposit Insurance Corporation (FDIC). In return, the depositor agrees to leave the money in the bank for a specific period: a few months, a year, or 10.

In the past, banks generally rewarded customers with higher rates on CDs with longer terms. However, in 2023, prices will favor the short-term investor. Short-term interest rates are high because investors expect long-term interest rates to fall.

Experts say what makes all of these options so attractive is that they carry almost no risk.

“Don’t worry about labels,” Papadimitriou said. “Whether it’s called a CD, checking account, savings account, or money market account, put your money where you can get the highest interest rate.”