October 15, 2017

Average Savings Account Interest


The average savings account interest rate is 0.6%. Many big banks offer even lower rates. Read this for the surprising truth about savings accounts.

Don't open a savings account just anywhere. Do your research first. Interest on savings accounts is so small these days that every penny counts.

Read our guide to learn what you need to know about savings accounts before moving forward.

The Average Savings Account

  1. What is the average interest on a savings account?
    The average annual savings interest rate is a 0.6%, according to the FDIC. Let's put this into perspective. You invest $1,000 in a savings account with a 0.6% APY for 5 years. After 5 years, you'd walk away with $1,003. That's only $3 in interest over a five-year period.

    Luckily, many banks out there offer higher interest rates. We'll help you figure out how to find them.

  2. What is a "good" interest rate on a savings account?
    Quantifying a "good" interest rate is tough. However, you can find interest rates close to 1%. While still not "good," it's more than the national average of 0.6%. Using our example of a $1,000 deposit, you'd make $51.01 in interest with this slightly higher interest rate.

  3. How is interest compounded in a savings account?
    Each bank compounds interest differently. Some compound it daily, some monthly and yet others yearly. How do you know which is the best? It sounds like daily compounding would yield the greatest return. However, given the same interest rate, the difference is minimal.

    Take for example, two savings accounts, each with an APR of 1.3%. One compounds interest daily, and one compounds monthly. They both return $1,067 at the end of 5 years. Don't focus on how frequently a bank compounds. Instead, focus on the rate they pay and fees they charge.

  4. What should you look for in a savings account?
    The right savings account will differ for each person. However, everyone should look for a few things:

    • No fees: There are enough savings accounts out there that you should be able to find one with no fees.
    • Insurance: Only put your money in a bank that has the proper FDIC insurance.
    • Simple transactions: Electronic transactions offer the most convenience, but you may want in-person capabilities too. Pay close attention to what the bank offers.
    • Availability of funds: Pay close attention to how long it takes a bank to release your funds for use.

  5. Do banks offer bonuses for opening a savings account?
    Some banks do offer incentives for opening a savings account. It's important to read the fine print, though. They usually require a minimum opening balance. They also require a minimum daily balance for a specific period in order to qualify. If you meet the requirements, the bank will deposit the "free money" into your account once you meet the requirements.

Online or Brick-and-Mortar Savings Account

  1. What are the benefits of a brick-and-mortar bank's savings account?
    Your local bank likely provides several savings account options. But it's usually at minimal interest rates. For example, brick-and-mortar banks usually offer interest rates as low as 0.1% APY for their customers. An online bank, though, may offer as much as 1.3% APY.

    Despite the lower interest yield, brick-and-mortar banks do have some benefits:

    • Personal service: You can talk to a banker face-to-face and get the financial advice you need.
    • More services: Brick-and-mortar banks usually offer a large variety of services, including credit cards, loans, and other investment vehicles.
    • ATMs: You can usually access your funds 24/7 at the bank's ATM.

  2. What are the disadvantages of a brick-and-mortar bank's savings account?
    The convenience of the service comes at a cost. Banking at a brick-and-mortar bank has some disadvantages:

    • Higher minimum daily balance: A bank's overhead causes them to require higher minimum daily balances to cover their overhead.
    • Higher fees: Brick-and-mortar banks charge more fees to keep their operation running.
    • Limited accessibility: You must conduct your business during the bank's regular business hours (unless they offer online services).

  3. What are the benefits of an online savings account?
    Online savings accounts offer several benefits because of the lack of overhead they must maintain. Because of this, you may enjoy:

    • Lower minimum balances: Many online savings banks don't require a minimum daily balance. This helps you avoid unnecessary fees, ultimately increasing your savings.
    • Lower opening balance requirements: Many online banks don't have an opening balance minimum. If they do, it's often as low as $25.
    • Higher interest rates: Banks without a local branch usually offer higher interest rates.

  4. What are the disadvantages of an online savings account?
    Higher interest rates and lower minimum balances cost you certain conveniences, including:

    • Longer hold times: Even with direct transfers, it's not unusual for online banks to hold your funds for 5 days before making them available.
    • Small selection of products: Online banks usually have a smaller offering of products. If you like to do all of your business in one place, this might not be ideal.
    • Lack of customer service: Many online banks rely on messaging services for customer service. If you prefer face-to-face conversations, this might not be ideal for you.

Funding Your Savings Account

  1. How much money should you keep in a savings account?
    Your savings account is a liquid account. You have instant access to funds. Because of the little interest made, keep the balance to 6 months' worth of your monthly expenses.

    Saving more than what you'd need to live on for 6 months is like throwing money out the window. There are many other investment vehicles you could use to park your money and earn interest. Too much money sitting idle in a savings account starts to lose value thanks to inflation.

  2. Should you keep money in a savings account?
    If you stuff your money under a mattress, definitely choose the savings account.

    However, if you have other choices, such as a CD or money market, consider your options. Money markets still allow a small number of withdrawals per month. However, they usually provide higher interest rates.

    If you won't meet the minimum requirements to hold a money market account without fees, though, opt for an online savings account with no minimum requirements.

  3. How much money do you need to open a savings account?
    Today, you can find several online savings accounts that don't have minimum deposit requirements. If you have a specific amount to deposit, though, shop around. You'll likely be able to score a higher interest rate for larger deposits.

Alternatives to the Savings Account

  1. What's the difference between a savings account and a money market account?
    Money market accounts and savings accounts look similar. They are both accounts offering small amounts of interest. The largest difference is how you access the funds.

    Savings accounts require an electronic transfer or in-person withdrawal. You can access your money market funds with a check or ATM card tied to the account. Money market accounts usually have higher minimum opening deposits. They often have minimum monthly balances as well. In exchange, though, they often provide higher interest rates.

  2. What's the average interest on a money market account?
    The average interest rate on a money market account is only slightly higher than a savings account. At just 0.09%, you'll make an average of 0.03% more on a money market account.

  3. What's the difference between a savings account and a CD?
    Another investment vehicle good for savings is the CD. The largest difference between the CD and a savings account is time. When you invest in a CD, you tie your money up for a specific period. For example, a 12-month CD means you can't touch your money for 12 months. If you do, you'll pay a penalty.

    In exchange for the time, you'll usually obtain higher interest rates on your CD.

  4. What's the average interest on a 12-month CD?
    On average, you can expect to receive around 0.28% on a 12-month CD. The longer you commit to tie up your money, the more interest you'll make. The average 24-month CD rate is 0.42% and the average 48-month CD rate is 0.65%.

  5. Is it smarter to have a checking or savings account?
    It might seem smarter to keep your funds in a checking account. This way you can avoid the excessive withdrawal fees. But, checking accounts have several key characteristics:

    • They provide unlimited access to your funds.
    • The average interest rate is just 0.04% (most banks don't pay any interest on checking).
    • They usually have fees for ATM withdrawals and not meeting minimum balance requirements.

    A savings account is better for long-term investment purposes. If you don't need access to the funds to pay your daily living expenses, consider using a savings account.

  6. What are the benefits of a linked checking and savings account?
    If you open a checking and savings account at the same bank, you may be able to link the accounts. This makes it easier to "pay yourself." With automatic deposits into your savings account, you'll be more likely to spend less. This gives your money the chance to gain a little interest, helping you create an emergency fund.

The FDIC and Savings Accounts

  1. How much money does the FDIC insure for savings accounts?
    Standard FDIC coverage for savings deposits is $250,000. This amount includes principal and any interest accrued.

  2. How does the FDIC pay you back if a bank fails?
    If you know for sure your bank has FDIC coverage, you'll receive your funds in one of two ways in the event a bank fails:

    • The FDIC may open another account for you matching the amount of your account balance from the old account.
    • The FDIC may issue you a check for the amount you lost, up to $250,000.

    In either case, the FDIC usually responds within one business day of a bank's failure.

Savings Account Interest

  1. Why do banks pay interest on savings accounts?
    Banks pay interest on savings accounts because they use your money to lend to others. Savings accounts are less liquid than checking accounts. The average borrower leaves their funds in the account to grow interest. The bank uses these funds to make loans to other clients. The bank charges these clients interest. They then pay you a portion of that interest, while keeping the rest for their own profits.

  2. Who decides which interest rate to offer?
    Ultimately, the Fed determines the interest rate, but that's not the only factor. Banks choose their own interest rate after learning the Fed's rate. They'll adjust the rate based on:

    • Competition in the area
    • Interest they receive from lending to other clients
    • The state of the economy

The Bottom Line

  1. Is it worth it to have a savings account?
    The minimal interest might make having a savings account seem pointless. It does have its benefits, though. Namely, it separates your money for savings from the money you typically spend. If you can set up a savings account and then forget about it, you'll be in good shape. Your money will sit and collect interest, yet be available should an emergency arise.

    Federal law prohibits you from withdrawing funds from your savings account more than 6 times per month. This can work to your favor, as it doesn't provide easy access to your funds. A savings account is best stocked with just enough for an emergency and nothing more.

Sources and References:

More from CreditDonkey:

More Articles in Money Tips


Leave a comment about Average Savings Account Interest?


Average Net Worth by Age

The average American has a net worth of $80,000. Considering the average retiree needs $39,000 per year of retirement, $80,000 won't get anyone very far.
More Articles in Investing







About CreditDonkey®
CreditDonkey is a bank comparison website. We publish data-driven analysis to help you save money & make savvy financial decisions.

Editorial Note: Any opinions, analyses, reviews or recommendations expressed on this page are those of the author's alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.

†Advertiser Disclosure: Many of the card offers that appear on this site are from companies from which CreditDonkey receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). CreditDonkey does not include all companies or all offers that may be available in the marketplace.

*See the card issuer's online application for details about terms and conditions. Reasonable efforts are made to maintain accurate information. However, all information is presented without warranty. When you click on the "Apply Now" button you can review the terms and conditions on the card issuer's website.

CreditDonkey does not know your individual circumstances and provides information for general educational purposes only. CreditDonkey is not a substitute for, and should not be used as, professional legal, credit or financial advice. You should consult your own professional advisors for such advice.