High-interest savings accounts are back - but you have to know where to look for them.
After enduring years of interest rates that were near-zero and rarely changing, bank customers finally have more profitable places to put their savings. Interest rates are rising, which makes this a good time to shop for savings account rates and perhaps other savings vehicles like certificates of deposit, money market accounts and even checking accounts.
The important thing to know about this environment is that interest rates are not rising across the board. Rates on some savings accounts and CDs are climbing rapidly, while others have barely budged. What that means is that some customers are profiting from rising interest rates much more than others. So, unless you know where to look for high-interest savings accounts, there is a good chance you could miss out.
How to find high-interest savings accounts
If you are wondering, "Where can I earn the most interest on my money?" here are seven tips to help you find the answer:
- Look online for high-interest savings accounts
Online savings accounts can help you earn a better interest rate in two ways: they increase the number of choices available to you, and online savings accounts generally offer higher rates than traditional, branch-based accounts.
The extra choice is important because most banks are local or regional, meaning that the rates you were offered in the past depended very much on where you lived. Now you have access to best-in-class interest rates via online savings accounts and CDs no matter where you live in the U.S.
This is especially important given the size of the rate advantage online savings accounts have over branch-based accounts. The latest MoneyRates America's Best Rates survey found that the average online savings account offered an interest rate of 1.193, compared to just 0.101 for the average branch-based account.
This means that online savings accounts typically pay you nearly 12 times as much interest. All of the ten best high-interest savings accounts in the latest survey were online accounts.
- Go small to earn big
When you consider banking options, look beyond huge institutions with household names. They might have stadiums named after them, but these companies tend to offer the lowest savings account rates.
There are three banks in the America's Best Rates survey with over a trillion dollars each in customer deposits. While the average savings account rate overall was 0.419 percent, two of these three banks offered a rate of just 0.01 percent, and the third offered just 0.03 percent.
That means the most a $10,000 savings account could earn at one of these mega-banks is $3 a year in interest. Even in an average savings account, $10,000 could earn $41.90 in annual interest; and in one of the best high-interest savings accounts, it could earn over $200. When you compare these numbers, it's easy to see why it really pays to look beyond the mega-banks if you want a high-interest savings account.
- Pay attention to rate tiers
Banks sometimes offer different interest rates depending on how much money you give them. These are referred to as rate tiers, with different rates applying to different-sized accounts.
When shopping for rates, pay attention to the rate tier that would apply to the size of account you intend to open. Don't be sucked in by an advertised rate that wouldn't apply to your account size. Instead, look for the best deal you can get for the amount of money you have to deposit.
- You can do even better
While interest rates are rising in general, some bank customers are benefiting much more than others. In fact, since relatively few banks are leading the charge toward offering higher rates, it is fair to say that a minority of bank customers are reaping the real benefit from this trend.
The latest America's Best Rates survey found that there was over a 1.50 percent difference between the best high-interest savings accounts and the category average. The same goes for high-interest CDs and money market accounts. So be choosy, because it really pays to get one of the best high-interest savings accounts instead of settling for average.
- Think long term
Not only are interest rates rising, but the gap between long-term CD rates and savings account rates is widening. That makes it more rewarding to commit your money for a longer period in a high-interest CD.
Remember, though, that there is typically a penalty if you take your money out before the CD's maturity date. So, only commit to a longer-term CD if you don't think you'll need the money before the CD's term is up. Also, it doesn't hurt to move some money into a high-interest CD that also carries a fairly small early withdrawal penalty, just in case.
- Consider fees before interest in checking accounts
Most likely, your banking needs include a checking account in addition to your savings. If so, you may want to find a checking account that offers a decent interest rate too -- but it is much more important to pay attention to their fee structure than their interest rate in this case.
Most checking accounts charge a monthly fee, and the average of these fees totals $162.96 per year. You are unlikely to find a checking account that pays enough interest to overcome the cost of that fee; so if you want to get the most out of your checking account, look for a bank that offers free checking.
- Minimize your checking account balance
When savings account rates were near zero, there was no great incentive to shift money from checking to savings. In fact, it often made more sense to keep an extra balance in checking as a cushion against overdrafts and to qualify for a fee waiver.
With savings account rates now more rewarding, you may want to keep a tighter rein on your checking account balance. Perhaps even have your paycheck directly deposited into savings rather than checking so you can have as much money as possible earning a better interest rate for as long as possible.
Remember that inflation has been running at around 2 percent a year lately. That means that most savings vehicles are actually losing ground to inflation. High-interest savings accounts and CDs give you a shot at staying ahead of inflation, which makes the difference between increasing or decreasing the value of your money.