COVID-19 created a banking dilemma. For many Americans, money has never been tighter, and yet plunging interest rates mean that savings accounts are earning a lot less these days.
In other words, just when people need to lean on their savings more, their savings accounts are doing less.
Is it pointless to keep funds in a savings account in this difficult environment?
As people look for answers, they may have to fight through a certain amount of confusion. That's because some long-held perspectives may be clouding their decisions about where best to hold short-term and emergency funds. Given the current economic climate, people may be inclined to ask these sorts of questions:
- Aren't all savings accounts pretty much the same?
- With interest rates so low right now, is putting money in a savings account even worth it?
- Why should I change banks when savings account rates change all the time?
- Isn't the best high yield savings account the one with the highest interest rate?
- It's not possible to lose money in a savings account, is it?
- Aren't there better options than banks today?
Finding a good, high yield savings account can still help you get more for your money. However, it's important to choose carefully.
This article explains high yield savings accounts and how they work. It also explores what amounts to myths surrounding these accounts in the COVID-19 economy, providing a reality check on whether or not they're accurate perspectives to hold going forward.
The more you understand the facts about high yield savings accounts, the better able you'll be to make safe and effective choices in this challenging time.
How Do High Yield Savings Accounts Work?
What's so special about a high yield savings account?
Technically, high yield savings accounts are no different from ordinary savings accounts. For example, there is no strict definition of what separates a high yield account from an ordinary savings account.
It's just that when you compare the top savings accounts to the average, you can see a clear difference.
Key characteristics for both regular and high yield savings accounts include:
- Federal deposit insurance for accounts from FDIC-member banks or NCUA-member credit unions
- Your balance does not fluctuate in value
- You can access your money at any time, with reasonable notice for processing
- Balances typically earn interest, though rates are fairly low because of the need to keep these accounts safe and accessible
- Savings account interest rates are subject to change at any time
Myth 1: All Savings Accounts Are Pretty Much the Same
This myth is false.
In some ways, savings accounts are the plain-vanilla flavoring of financial products. They are safe, to the point of being boring.
The lack of exotic features drives some people to assume there isn't much to distinguish one bank's savings accounts from another's. The myth is that there's no point in shopping around for a savings account because they're all pretty much the same. But this is wrong.
As of the third quarter, 2020 MoneyRates' America's Best Rates survey, the best high yield savings accounts were paying better than four times the average savings account rate.
The chart below shows how the average savings account rate compared with the ten best high yield savings account rates:
|Bank||2020 Q3 Avg. APY|
|Average Savings Account Rate||0.19%|
|BankFive High Yield Savings Rate||0.99%|
|SFGI Direct High Yield Savings Rate||0.97%|
|Axos Bank High Yield Savings Rate||0.96%|
|Ally Bank High Yield Savings Rate||0.92%|
|Salem Five Direct High Yield Savings Rate||0.90%|
|American Express National Bank High Yield Savings Rate||0.88%|
|Marcus by Goldman Sachs High Yield Savings Rate||0.85%|
|Synchrony Bank High Yield Savings Rate||0.85%|
|Discover Bank High Yield Savings Rate||0.85%|
|Capital One Bank High Yield Savings Rate||0.83%|
Myth 2: It's Not Worth It to Have a Savings Account With Interest Rates So Low
This myth is not entirely true.
A combination of Federal Reserve policy and weak economic demand has driven savings account rates to unusually low levels.
When people look at savings account rates these days, they see a bunch of small percentage numbers. That doesn't get anyone very excited.
This leads to a myth that savings account rates aren't worth bothering with these days because interest rates are so low.
While it is accurate that savings account rates are very low right now, it's not true that it's not worth it to have a high yield savings account.
To demonstrate why getting a better interest rate still matters, it helps to convert the numbers from percentages to dollar figures.
On a $10,000 savings account, the average savings account rate of 0.19% would produce $19 a year in interest. The top savings account rate of 0.99% would produce $99 a year.
To decide whether that matters, imagine this test:
Suppose you were sitting in a large room and someone came and offered to hand you an envelope with $19 in it. At the same time, they explained that over on the other side of the room was an envelope containing $99 which you could have instead if you chose to walk across the room to get it.
If you think that the difference between $99 and $19 is worth a little extra effort, then it should be worth it to you to shop for a better savings account rate.
Myth 3: Changing Banks Makes No Sense When Savings Account Rates Change All the Time
This myth is false.
Unlike CDs, savings accounts do not guarantee a specific interest rate for any length of time. Savings account rates are variable, meaning they can and do change frequently.
The myth that results from this is that there's no point in switching to a savings account with a higher rate when that rate is just going to change anyway.
While rates themselves do change all the time, for the most part the same banks typically have the highest rates.
MoneyRates studies the savings account rates from 100 banks every calendar quarter. Eight out of the top ten banks in the most recent survey have placed in the top ten at least half the time in each quarterly study over the past two years.
In other words, rates themselves may change - but the same banks are pretty consistently among the leaders. This means that it usually pays to choose one of those leading banks.
Myth 4: The Best High Yield Savings Account is the One With the Highest Interest Rate
This myth is often wrong.
One thing about today's low interest rates - it's easy for banks to get people's attention by advertising a higher rate.
But if you think bank ads that feature high rates make your life easier as a consumer, you are buying into a myth. This is the myth that all there is to picking the best high yield savings account is finding the one with the highest rate.
When shopping for rates, it's important to pay attention to any restrictions on how a rate is applied to your account.
Banks frequently offer an attractive rate only for a very limited time. That special promotional rate will soon expire, leaving you stuck with a mediocre interest rate.
Other rates are advertised to attract attention, but the catch is that they only apply to part of your balance. A special rate that only applies to the first couple thousand dollars in your account will have little impact on a much larger account.
When MoneyRates ranks the best savings account rates every quarter in our America's Best Rates surveys, we read the fine print for you. The methodology is designed to screen out temporary promotional rates or those that only apply only to a portion of your balance.
There's a little more to picking the best savings account than jumping at the highest advertised rate. You have to also take into account how that rate will be applied to your account. That determines how much an account will actually earn.
Myth 5: You Can't Lose Money in a Savings Account
This myth is false.
Really, the first reason for choosing a savings account is safety.
Savings accounts are not invested in securities that fluctuate in value. Deposits in them are covered by FDIC or NCUA insurance, for up to a total of $250,000 that a customer has at any one financial institution.
These protections create the impression that you can't lose money in a savings account. Unfortunately, this is a myth. What does a closer look reveal about that myth?
You can lose money in a savings account because of fees.
A study by MoneyRates.com in mid-2020 found that most savings accounts now charge a monthly service fee, regardless of how you use the account.
The average amount of these fees is $4.89 per month, which comes to $58.68 per year.
In today's low interest rate environment, that fee could easily wipe out any interest you earn on the account. As a result, your savings account could end up costing rather than earning you money.
Fees are another reason why there's more to finding a good savings account than just looking at the interest rate. In fact, sometimes banks use a high rate to lure customers to accounts that charge a fee, knowing that those fees will more than make up for the extra interest the bank is paying out.
Small accounts are especially vulnerable to fees. Most savings accounts that charge a fee will waive it for larger balances. Also, in a small account, the interest you earn is likely to amount to a small fraction of the typical monthly service fee.
The good news is that there are still plenty of savings accounts that don't charge these fees. Be sure to check before you choose an account.
Myth 6: There Are Better Options than Banks Today
This myth is false.
In recent years, some financial technology companies have advertised that they've come up with a better solution than savings accounts.
These accounts have offered interest rates well above what savings accounts are offering. The myth these companies are trying to sell is that those higher rates mean that savings accounts are outdated.
Upon closer examination, these gimmicky new products turn out to guarantee neither the interest rate they offer nor the value of your balance. They MAY not offer the safety of deposit insurance backed by the FDIC.
Some of these accounts determine interest using complicated formulas that only work if certain conditions pan out. A few of these accounts are little more than Ponzi schemes which depend on continuing to attract more and more depositors.
The old rule applies: If something seems too good to be true, it probably is.
Certainly, if the company can't certify that the account is covered by FDIC or NCUA insurance, it shouldn't be considered a true savings account.
The bottom line is, there are savings accounts out there that can earn you significantly more interest. Just make sure what you're getting really is a savings account.