Saving money should be a fundamental part of any financial plan, along with earning income and paying the bills. Savings accounts can be used to build emergency funds, finance large purchases and put you on track for a comfortable retirement. Because saving money is so important, you’ll likely want to look for an account that gives you the highest rate of return. This means finding an account that pays a high interest rate and charges low or no monthly fees.
Understanding interest on savings accounts
A savings account provides you with a safe place to keep and grow your money. The primary way it grows your funds is by paying interest on your balance. Interest is calculated periodically by multiplying the account balance by the current interest rate. The bank or credit union then deposits this total into the account. Financial institutions set their own rates, usually influenced by Federal Reserve rates.
The key number to pay attention to is the annual percentage yield (APY), which reflects the total amount of interest paid on an account based on the interest rate and frequency of compounding for a 365-day period.
If your account earns compound interest, the interest you earn is deposited back into your account which then earns interest during future compounding periods. Interest is usually compounded daily, monthly, quarterly or annually. You’ll earn more money if your account compounds more frequently.
As CIBC notes, compounding is often compared to creating a snowball effect because the initial deposit and interest earnings are “continuously working together to grow your savings.”
What types of savings accounts earn you the most money?
Consumers have access to a wide range of savings accounts, but the four main options are traditional savings accounts, high-yield savings accounts, certificates of deposit (CDs) and money market accounts.
As a general rule, traditional savings accounts pay the lowest APYs. The average savings rate was 0.45% as of May 2024, according to the Federal Deposit Insurance Corp. (FDIC), but some accounts offer the bare minimum of 0.01%. The average money market rate was 0.68%, while average CD rates ranged from a low of 0.23% for a 1-month CD to a high of 1.80% for a 12-month CD. Nearly all CD terms paid a rate of at least 1.33% on average.
However, those averages don’t provide a complete picture of what you can earn from a savings account because the best accounts offer much higher interest rates. When it comes to earning the highest return, it’s a close race between high-yield savings accounts, money market accounts and CDs, though high-yield accounts might hold a slight edge.
Here’s a quick breakdown of some of the highest rates offered on each.
High-yield savings accounts
As the name suggests, high-yield savings accounts offer much higher-than-average interest rates. A high-yield account is a good option when you value liquidity because there usually aren’t any restrictions on when you can access the money.
Online banks typically offer the best rates, though many traditional banks also offer high-yield options. Fees and account minimums at online-only banks tend to be lower than you see at a traditional savings account. However, online banks may not offer the wide selection of banking products you can often find at large traditional banks.
The best high-yield savings accounts offered APYs as high as 5.27% as of June 2024.
Money market accounts
A money market account combines some of the best features of savings accounts and checking accounts, letting you earn interest on your deposits while also allowing check-writing privileges and debit card access. You will usually get a higher interest rate with a money market account than a traditional checking account, though you might face a higher minimum deposit. Monthly transaction limits might also apply.
The best money market accounts offered APYs as high as 5.30% as of June 2024.
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APY APY = Annual Percentage Yield. Rates as of 04/03/2024
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CDs
CDs are savings accounts that give you a fixed interest rate for a fixed period of time, known as terms. Terms typically range from three months to 10 years. Mid-term CDs of one to three years usually offer the most competitive interest rates, though it varies depending on the bank and broader interest rate environment.
The downside to CDs is that they’re less liquid than traditional or high-yield savings accounts. If you withdraw your money before the CD term is up, you’ll usually face an early withdrawal penalty. You might also face high minimum opening deposits to get the best rates.
The best CDs offered APYs as high as 5.51% as of June 2024.
Key factors to consider when choosing a savings account
There’s a lot to consider when choosing a savings account, and the best account for you will depend on your individual needs and priorities. If you simply want an account that offers the highest APY, you’ll probably be fine with an online-only bank or fintech. But if you value a full-service banking experience that includes in-person banking, you’ll need to find an account with a bank with local branches.
Another thing to consider is how you plan to use the account. If it’s for a long-term savings goal, then a CD might work best since you can lock in the current interest rate for years. If you want quick and easy access to the money, then a high-yield savings account is a better option.
Here are some common things to consider when choosing a savings account:
- Amount of interest paid
- How often interest compounds
- Initial deposit requirement
- Minimum balance requirements
- Account fees, including early withdrawal fees
- Interest rate tiers
- Accessibility and ease of use
- Transaction limits
- Bonus offers
- Access to other accounts and products
How to compare different saving accounts
When comparing savings accounts, review the above features and rank them by order of importance. If your main goal is to get the highest APY, then the comparison is easy — simply review financial sites to find which savings account offers the best rates. But if you value other features along with the interest rate, ranking those features will give you a better basis of comparison to find the account that checks the most boxes.
One thing you should always check when comparing different savings accounts is the fee structure. Many accounts don’t charge any fees. However, some charge monthly service fees that can cut into your earnings.
How to maximize your savings with the right account
The main way to maximize your savings is by ensuring your account pays a competitive APY. No matter how many other bells and whistles the account offers — such as no fees or minimums and unlimited transactions — you won’t be able to grow your savings very fast if you’re getting a minimal interest rate.
Here are some ways to maximize your savings with the right account:
- Ensure it pays an interest rate in line with the highest rates available
- Automate your deposits to keep building wealth
- Find an account that compounds daily to get the biggest boost from your interest
- Build a CD ladder that lets you avoid penalties and take advantage of changing interest rates
We receive compensation from our partners for Featured Offer placements, which impacts how and where their offer is displayed.
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APY Annual Percentage Yield
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Minimum deposit requirement
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Frequently asked questions (FAQs)
High-yield savings accounts are insured up to $250,000 by either the FDIC or National Credit Union Administration as long as the account is with a member institution. This means balances up to that amount are federally protected.
You can’t lose money on a savings account like you can with stocks or mutual funds because the money you put into the account stays there until you take it out. Even if you get hit with an early withdrawal fee for a CD, it will come from your interest instead of the money you deposited.
Interest accrues daily but is typically paid monthly, although, with CDs, the interest is often paid at the end of the term.
Interest is calculated by multiplying the account balance by the current interest rate.
