If you are keeping a good amount of spare cash in a basic savings account at a big bank, you are missing out.
After paying paltry rates for years, many banks — especially online institutions — are paying higher rates on federally insured savings accounts and certificates of deposit. Yields have risen as the Federal Reserve has increased its benchmark rate in an effort to tame high inflation.
The nation’s biggest banks, on the other hand, have kept interest rates low. Flush with money people deposited early in the pandemic and seeing lower demand for borrowing because of higher interest rates on loans, they have had little incentive to attract more money.
The online banks aren’t offering savings account rates that keep pace with inflation, which slowed to 6.5 percent on an annual basis in December. But many now offer savings accounts with annual percentage yields of 3.3 percent or higher, and 4 percent or higher on one-year certificates of deposit. At least one bank recently began advertising a 5 percent savings account rate, according to DepositAccounts.com.
That compares with the average national bank savings account rate of a measly 0.23 percent, according to Bankrate, and just 0.01 percent at the nation’s biggest banks.
If you have a relatively small savings stash, moving your money may not reward you with a big bump in interest earned. But the payoff increases at higher balances. Someone depositing $25,000 would earn more than $800 after a year at 3.3 percent, compared with just $2.50 with a rate of 0.01 percent.
While the benefits of moving money into a higher-paying account may seem obvious, a lot of people are not doing that, and money experts say there are reasons people may be reluctant.
Many people may simply be used to low savings rates and skeptical that higher rates will endure — so why bother? “It’s been a long time since savings accounts have generated any income,” said Mark McCarron, chief investment officer at Wescott Financial Advisory Group in Philadelphia.
Also, after bulking up on savings during the depths of the pandemic, people are starting to spend down their cash, Mr. McCarron said. (At the end of 2022, the personal savings rate was 3.4 percent, down from 7.5 percent a year earlier, according to the Federal Reserve Bank of St. Louis.) He noted the various economic winds buffeting consumers: Inflation has driven up the price of household staples; interest rates on home and car loans have risen; and the economic outlook is uncertain.
And while unemployment claims remain low, layoffs at tech and media companies have prompted unease. Some people, Mr. McCarron said, may not see the point of moving cash that they expect to spend soon anyway.
Other factors may also come into play. Some people may be intimidated by the math behind compound interest, so simply seeing a higher annual rate advertised may not be enough to make them take action, said Perry Wright, senior behavioral researcher at Duke University’s Common Cents Lab.
In addition, he said, when people are unsure about a decision, they often look to see what others are doing. But unlike observing what neighbors are spending money on — cars, new landscaping — it’s not easy to know where they’re depositing their cash. “Savings is invisible,” Mr. Wright said.
“It all adds up to a lot of inaction,” he said.
Even if savers are well aware of higher rates, they may think opening a new account will be a hassle, so “the juice is not worth the squeeze,” said Feraud Calixte, a certified financial planner in Burlington, N.C. “I think it’s inertia.”
Opening online accounts, however, is generally simple to do these days, said Ken Tumin, founder of DepositAccounts.com, part of LendingTree. It’s not necessary to abandon your main checking account to open a high-yield savings account at a new bank. Just link the two accounts so you can transfer funds if needed.
Others may worry that moving cash will cost them at their main bank since many perks, like waiving monthly fees or reimbursing out-of-network A.T.M. charges, depend on a minimum balance. Consider leaving some funds at your main bank to meet the minimums, but move extra cash to the online bank.
Here are some questions and answers about savings.
Why should I move cash if banks can change the rate they offer at any time?
It can be frustrating to open a new account with an attractive rate, only to see another bank beat that rate the next day. But constantly chasing rates is time-consuming and ultimately unhelpful since you have to leave the money in the account to earn the rate, Mr. Calixte said. Mr. Tumin suggested picking a bank that pays generally competitive rates and sticking with it for a while.
Some banks also offer incentives for new accounts. Discover, for instance, is offering a bonus of $150 for new accounts with a minimum deposit of $15,000, and $200 with a minimum of $25,000, through March 15.
If you want assurance that the rate won’t fall soon after you open an account, you could opt for a certificate of deposit, which pays a guaranteed rate for a fixed period, like one month, six months or a year. You’ll generally pay a penalty, however, if you withdraw funds before the full term.
Will I automatically get a bank’s newest high rates on my online savings account?
Not necessarily. Some banks — like Marcus, Goldman Sachs’s online bank — may automatically increase your interest rate to the level offered to new accounts. But others, like Capital One, make customers take the step of opening a new account and transferring their funds into it. A Capital One spokesperson said opening a new account took only five minutes.
How can I compare yields at different rates?
Online savings calculators, like the one offered by the federal government’s Investor.gov website, can show you what you’ll earn on your cash, at different rates.