The Federal Reserve recently raised interest rates for the first time in a decade, but don’t expect the savings accounts at your brick-and-mortar bank to notice. Rates have held at historic lows for years and will stay that way for some time, but you’ll be pleased to know there are still plenty of high-interest savings accounts online. While the interest earned from your savings account isn’t likely to fund your retirement, it can still add up, particularly on higher balances.
The Simple Dollar has examined several of the most popular online banks to find the best high-yield savings accounts in 2016. All of these FDIC-insured banks offer high interest rates, low or no minimum balances, and no account maintenance fees. Here are our top picks:
We’ll also give you a primer on high-yield savings accounts, including what that interest rate really means and whether online banking is a smart choice for you.
What Is a Savings Account and Why Does Everyone Need One?
A savings account is a basic bank account that provides you with safe and relatively easy access to your money. A savings account is similar to a checking account in many ways, but there are some key differences — most notably, a savings account usually provides a higher interest rate than a checking account does.
In fact, in most cases, you won’t earn any interest on the money in your checking account, but you should expect to earn anywhere from 0.1% to 1.1% interest on your savings account, depending on which bank you use. (Interest is money the bank pays you in return for being able to lend your money out in the form of mortgages or loans to other customers.) While that amount of interest isn’t going to make you rich any time soon, it’s better than nothing.
Another key difference is that federal law limits you to a handful of withdrawals from your savings account each month (six), while checking accounts typically offer almost unlimited use.
Most online savings accounts offer higher interest rates than the ones at your local bank, but they may have more extensive restrictions on withdrawing money or require a few days of lead time. Depending on the financial institution you choose, you’ll have different requirements as to how many monthly withdrawals you can make on your savings account, or the minimum balance that must remain in the account.
A high-interest savings account is nearly as important as a functional checking account. Because it’s a “liquid” asset — meaning you can withdraw it very easily, compared to say, cashing out a 401(k) or selling your home — it’s an ideal place to store money that you don’t want to spend on monthly expenses, but that you may wish to use in the near future.
For example, a high-yield savings account is a great place to keep and grow your emergency fund — the money you should have set aside in the event of an unexpected medical bill, car repair, or other unforeseen expense. Experts recommend having enough money in your emergency savings account to cover at least three to six months’ worth of expenses. If you’re not there yet, a relatively painless way to build your emergency fund is to automatically set aside a small amount of money each payday through an automatic transfer from your checking account.
What Types of Savings Accounts Are Available?
Choosing the right type of savings account is important as well. There are several different types of accounts available, so knowing all of your options up front is helpful.
Traditional Bank Savings Account
Almost all “brick and mortar” banks offer saving accounts. This is a convenient option for many people who want their savings in the same spot as their regular checking account. It’s also nice to be able to stop in and get help in person if you need it, or to be able to withdraw money instantly and for free at the bank’s ATM. The biggest drawback to these types of accounts, though, is that they typically pay a low interest rate and may require a minimum balance to avoid monthly fees.
Online Savings Account
Another option that’s becoming increasingly popular and more widely available is an account through an online bank. These accounts typically offer a higher interest rate since the companies have less in the way of overhead expenses, so you’ll get a nice return on your money. The best online savings accounts typically do not have any maintenance fees attached to them, either. On the downside, it can take a couple of days to access your funds.
Kids Savings Account
Most banks also offer regular savings accounts specifically for children. If you choose to create an account for your kids, you’ll have full control over it and can limit your child’s withdrawals and deposits.
Is a High-Yield Savings Account Your Best Option?
High-interest savings accounts are an ideal place to keep your emergency fund or any money to which still you need ready access. Your money will be safer than if you stuffed it under your mattress, and it will grow a bit, too.
However, regardless of where you open a savings account, federal regulations limit you to six withdrawals or outgoing transfers each month. Exceed that number and you could be charged a fee. One notable exception is ATM withdrawals, which are not restricted.
Remember, there are fewer ways to get your money from a savings account versus a checking account. You may not be able to write checks or get a debit card for your savings account — both are perks typical of checking accounts. But if you opt for checking, you may get a very low interest rate, or none at all.
A money market account may be a happy medium between the two: You’ll still earn a decent interest rate, but you’ll often have check-writing and debit card privileges, too.
Another common savings option is a CD, or certificate of deposit. CDs may earn a higher interest rate than savings accounts, particularly at brick-and-mortar banks. This may not be the case online, however, where you can find a number of high-interest savings options. Note that you may need a bigger initial deposit to open a CD, and must agree not to touch your money for a specific term or you’ll have to pay an early-withdrawal fee.
What Does a ‘High Interest Rate’ Really Amount To?
Online, you can easily open a high-yield savings account with an interest rate around 1.0% APY. That’s certainly much higher than the national average of .06% APY as of March 2016, but it’s still not going to make you rich.
Let’s crunch the numbers to see just how much you can grow your money in a savings account. We’ll assume you make an initial deposit of $5,000 and don’t touch it for five years. We’ll also assume that you don’t make any more deposits and interest is compounded (added to your balance) daily:
- At 0.01% APY (a typical savings interest rate at very large brick-and-mortar banks), you’ll have $5,002.50 after five years.
- At 0.09% APY (a hair above the national average), you’ll have $5,022.55 after five years.
- At 1.00% APY (a competitive high-interest savings account rate from an online bank), you’ll have $5,256.35 after five years.
As you can see, the difference between a high-yield savings account and lower-yield options amounts to a couple hundred dollars in this example. Significant? Yes. But it also demonstrates how even a high-interest savings account won’t be making you rich — the interest is merely a nice bonus.
If you truly want to grow your money over the long term, you’ll need to consider more sophisticated investments. If you’re interested in jumping into the stock market, a great place to get started is our article on the Best Online Stock Trading Brokerages. If your focus is on building your retirement fund, check out our guide to the Best IRA Accounts.
Pros and Cons of Online Savings Accounts
If you’re wondering whether it’s worth moving your savings online to take advantage of a high-interest savings account, here are some of the benefits:
- Interest rates: Online banks offer many times the national average on savings accounts, which was 0.11% APY as of January 2016, according to Bankrate. In fact, it’s not uncommon for some of the biggest banks to offer just 0.01% APY.
- Low or no fees and minimums: Many online banks don’t charge the monthly account maintenance fees you find at brick-and-mortar institutions. Several, like most of the banks on our list, also don’t require a certain minimum balance to open or maintain the account.
- 24/7 account access: If you like to do your banking at unconventional hours, that’s not a problem online. You’ll probably be able to print statements for free whenever you need them, and may have access to conveniences like account alerts and online bill pay. These tools are often better at online banks, which have optimized their technology to keep customers happy.
Of course, there are also some drawbacks to banking online:
- Harder to deposit and access your money: While direct transfers from external accounts are convenient, you could be looking at longer hold times before your money is available. Five days is typical. Even banks with mobile check deposit may not allow checks over a certain amount to be deposited that way, meaning you’ll have to mail larger checks. Also, your online bank may not allow cash deposits.
- Lack of in-person service: Sometimes you just want to talk to a real person, and do it in person. While online banks offer varying degrees of customer service, you won’t be able to talk to a teller or a bank manager. A personal relationship with your bank can come in handy if you ever have problems or need a bit of extra assistance.
- Lack of other products: If you only need a savings account, you might not care whether your bank offers other account options or products such as loans and credit cards. However, there’s something to be said for the convenience of keeping your banking with just one or two institutions.
How Do I Choose the Best Account for Me?
Choosing the best savings account for yourself is actually relatively simple. You’ll first want to decide whether a traditional or online bank is right for you. Keep in mind that online banks typically pay higher interest rates while traditional banks provide easier access to your money. Many people choose to open a savings account with the same bank as their checking accounts for convenience’s sake; however, it’s important to remember that you may be able to find a better rate or account with another bank.
It’s also important to shop around to find the highest interest rate and the lowest fees. Some banks may offer a good rate but attach fees that make the account more expensive. Likewise, some financial institutions have more restrictions on the accounts they offer, so be sure to get all of the information you can prior to opening an account. At the very least, you should be able to contact customer service via phone to discuss your account and get answers to any questions you have.
Personal Savings Calculator
To help you determine what kind of account and what rates to generally look for considering your needs, we’ve created this personal savings calculator.
The Best High-Yield Savings Accounts
You won’t get a flashy website or lots of other banking options with MySavingsDirect, an online division of Emigrant Bank, a large bank based in New York City. But if you’re just looking for a basic savings account with a high interest rate, you’ll get 1% APY on its High Interest Savings Account.
Even better? You won’t pay any monthly maintenance fees or any other hidden fees, and you don’t need a hefty balance to open the account. You’ll access your money by making electronic transfers from up to two linked external checking accounts.
Synchrony Bank’s High Yield Savings Account offers an impressive 1.05% APY. There is no minimum balance required to open an account, though you will have to keep at least a $30 balance to avoid a $5 monthly maintenance fee.
You can make deposits and withdrawals via electronic transfers, over the phone, or with an optional ATM card. There’s also a convenient mobile check deposit feature.
Depending on your balance and the length of time you’ve had your account, you may also qualify for Synchrony’s OptimizerPlus perks, which include travel discounts, ATM fee reimbursements, and free identity theft resolution services.
If you’re looking for an online bank that’s a little better-known, British megabank Barclays might fit the bill. Its U.S. division offers an Online Savings Account with 1.00% APY, no minimum balance, and no monthly maintenance fees. You can make deposits via mobile check deposit, direct deposit, electronic transfer, or mail.
If you’re willing to keep your hands off your money for awhile, Barclays also offers a Dream Account with 1.05% APY. Make deposits of up to $1,000 for six months, and earn a 2.5% bonus on your interest; make no withdrawals for six months and earn another 2.5% bonus.
High-profile online bank Ally offers 1% APY on its Online Savings Account with no account minimum and no monthly maintenance fees. Ally also boasts some of the most transparent account disclosures in online banking as well as 24/7 customer service, a rarity.
Make deposits via electronic transfer, mobile check deposit, direct deposit, or mail. You can also link up to 20 external accounts to your savings account, should the need arise.
If you want to keep your funds more readily available, Ally’s Money Market Account earns 0.85% APY and allows unlimited no-fee ATM withdrawals.
You’ll need at least $500 to open an Online Savings Account with Discover Bank, but you’ll get a healthy 0.95% APY. There is no ongoing minimum balance or monthly maintenance fee.
Like Ally, Discover has 24/7 customer service and a convenient mobile-banking app that allows mobile check deposit. You can also make deposits via electronic transfer, direct deposit, and mail.
For easy ATM access, Discover’s Money Market Account features free withdrawals at 60,000 ATMs nationwide. That account earns 0.80% APY on balances under $100,000, or 0.85% over that amount.
Salem Five Direct
The online division of Massachusetts-based Salem Five Cents Savings Bank, Salem Five Direct is offering a juicy 1.10% APY on its eOne Savings Account. There are no account minimums or monthly maintenance fees, but it does require a $100 minimum deposit, and is only available to new customers.
The bank offers free mobile banking and deposits though its app, and you can pair the savings account with a free, interest-earning (0.25% APY) eOne Checking Account, which offers no-fee ATM withdrawals and reimburses ATM fees charged by other banks up to $15 per month.
Remember, High-Interest Savings Accounts Aren’t Your Only Option
Savings accounts are popular because they’re easy to use, keep your money safe, and they’re everywhere, including the Internet. Some of your best options online include Synchrony Bank, Ally and the other banks on our list above.
However, you do have some other options. Money market accounts can give you a little bit more flexibility, though you may have to sacrifice a little bit of interest. CDs may give you more interest, particularly with higher deposits, but you won’t be able to touch your money for a long time — not ideal if you need a place to stash emergency savings. And of course, if you need the freedom to make a large number of deposits and withdrawals, you’ll need to look at checking accounts instead.