Savings Account Interest Rates: A Comprehensive Guide
We all know it’s important to save, but there are different kinds of saving. One is saving for retirement. This is generally an ongoing form of saving, in a 401(k), IRA, or other retirement account that comprises a mix of stocks and bonds. Another is saving a smaller amount in a more liquid form, to keep on hand as an emergency fund. That’s where savings accounts come in.
Why Use Savings Accounts for Your Emergency Fund?
Savings accounts are safe places to stash your emergency fund, which experts say should equal at least 3-6 months of living expenses (more if your job is less stable or you are the sole breadwinner of your family). But why do you need this money in a liquid account like a savings account?
- Avoiding Early Withdrawal Penalties: Keeping some savings separate from your retirement accounts is wise because tapping into retirement accounts before age 59 1/2 incurs a 10% early withdrawal penalty, plus taxes.
- Quick Access: You may need to access your emergency fund quickly to cover a medical bill, tide you over while looking for a new job, or pay for immediate car or home repairs. In such cases, selling stocks for funds might not be feasible.
With a savings account, you get high liquidity, meaning accessing your savings in an emergency is quick and easy. Plus, you can rest easy knowing that a stock market crash won’t wipe out your rainy day fund. Your deposits are also insured by the federal government.
Understanding Savings Account Features
While savings accounts are safe and reliable, they typically offer low rates of return. Here’s a closer look at the essential features to consider when choosing a savings account:
APY (Annual Percentage Yield)
When shopping for the best savings accounts, focus on the Annual Percentage Yield (APY). The APY tells you the interest rate you’ll earn over a year of savings, taking compound interest into account. Some accounts compound daily, others monthly, and still others annually. The more frequently your money compounds, the higher your APY.
Minimum Monthly Deposit
Some savings accounts have minimum initial deposit or minimum monthly deposit rules. If you’re just starting to build your emergency fund, you might not have enough to meet these requirements. Look for accounts without minimums if your income varies or you’re starting small.
Rate
The rate on a savings account, or the periodic rate, is used to calculate the APY. When comparing accounts, it’s essential to look at both the rate and the APY. With some accounts, the rate and the APY will be the same, usually because those accounts compound once per year.
Fees
Be aware of any fees associated with the accounts, such as maintenance fees, annual fees, or minimum balance fees. Fees can cut into your earnings from the account. You may find that a small fee is worth it if the account’s other features or APY are attractive. Always balance yield and fees when choosing the best account for your needs.
Availability
Savings accounts typically don’t offer check-writing capabilities. If you already have a checking account, you may not need this feature. Remember, savings accounts are subject to a rule that limits pre-authorized payments to 6 per month, not applicable to ATM withdrawals.
Savings Account Reviews
Here are some top savings accounts you might consider:
- American Express Personal Savings Account
- Ally Bank Savings Account
- Barclays Bank Savings Account
- Capital One 360 Savings
- CIT Bank Savings Account
- Dime Bank Savings Account
- Goldman Sachs Savings Account
- Northpointe Bank Savings Account
- Sallie Mae Bank Savings Account
- SmartyPig Savings Account
- Synchrony High Yield Savings Account
Bottom Line on Savings Accounts
Many Americans lack emergency savings, so if you’re reading this, you’re ahead of the curve. To find the right savings account rate for your needs, take a holistic view and evaluate all the features explained above. The best savings accounts will have a high yield and no or low fees.
Once your savings reach a comfortable level – say, six months of expenses plus your health insurance deductible – you might not need to continue funding your savings account unless your job is unstable or you are the sole breadwinner of your family. You can focus on boosting your retirement savings with investments that typically earn a higher rate of return than savings accounts. If you need to dip into your savings account for an emergency, that’s fine – that’s what it’s there for. But it’s wise to rebuild your savings as soon as possible to be prepared for whatever comes your way.