Savings accounts are a low-risk way to earn some interest on your money, but they won’t return as much as investments like stocks and bonds Saving money is important to your personal finances, and it’s helpful to keep some funds easily accessible in a savings account Standard savings accounts may pay very little in interest, but you can seek out higher-yielding options from banks and online financial institutions
Savings accounts provide a place to set aside money for your various financial goals. In the past, they were also a good way to earn some interest — but these days, they pay very little in interest.
With that in mind, are savings accounts worth it? And if not, what are some good alternatives to consider?
Savings account basics
Savings accounts are a type of bank account designed to help you save money. They are available from just about every bank and credit union, and may even come bundled with your checking account automatically.
The main difference between savings and checking accounts is that savings accounts are designed for saving money while checking accounts are designed for everyday spending. Checking accounts will come with a debit card and a checkbook, while savings accounts will not.
You can transfer money back and forth between checking and savings — depositing savings from your paycheck, or withdrawing savings to cover unexpected expenses. But you won’t typically spend money directly out of your savings account.
Savings accounts typically pay interest, which is measured in annual percentage yield (APY). APY measures the amount of interest you’d earn on a deposit after 1 year. For example, if an account offers 1% APY and you deposit $100, you would earn $1 in interest in a year.
Benefits of savings accounts
There are some key benefits to saving accounts over checking accounts:
Pays interest: Savings accounts pay interest, which helps your money grow automatically. Rates of interest are measured in APY, and each account will have its own interest rate. Basic savings accounts pay very little — perhaps just 0.1% APY — while high-yield options can offer 1% to 3% or more.
Safe and insured: Savings accounts are a very safe place to park your money. You can withdraw at any time, and deposits are insured for up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Even if your bank were to go out of business, you would still have access to your funds via FDIC insurance.
A separate place to save: Savings accounts provide a separate place to save money toward your financial goals, which can help make it easier not to spend it. If you keep all your funds in a checking account, it can be more tempting to spend your savings.
Simple to open and use: Savings accounts are simple and widely available from most banks and financial institutions. They are often linked to your primary checking account, which makes transferring money back and forth quite simple.
Liquid savings: Savings accounts provide a place to park “liquid” savings, meaning that money is accessible at any time. Unlike bonds or certificates of deposit, savings accounts provide ultimate flexibility in how and when you withdraw money.
Downsides of savings accounts
But traditional savings accounts aren’t without their downsides:
Low yields: Compared to other options, savings accounts tend to pay low interest rates. The national average rate is just 0.21%. That means a $100 deposit would only earn $0.21 after a year. Savers can earn higher yields by utilizing a high-yield savings app like Tellus, which offers a savings rate of 3.85-4.75% APY—that’s up to 22x higher than the average savings account.
Withdrawal limit: Some savings accounts have a limit on the number of withdrawals you can make in a given month. This is typically 6 withdrawals per month. This limit is no longer required by law, but some banks still have it in place.
Minimum balance requirements: Some savings accounts require a minimum balance — $100, for example. Others may have no minimum but have a monthly fee if the balance is below a certain amount.
Monthly fees: Some banks charge a monthly fee to have a savings account, which often eliminates the benefit of earning interest. It’s best to look for accounts that don’t have monthly fees.
Are savings accounts worth it?
These days, savings accounts pay next to nothing in interest. The national average is just 0.21%, which means you would earn around $2 per year in interest on a $1,000 deposit. If rates are low, is a savings account worth it?
Despite low rates, there are still benefits to having a savings account.
The most significant is that it can help you save money. Having a separate account for savings provides a psychological benefit. By keeping savings separate from your checking account, you’re more likely to actually save.
Plus, most checking accounts don’t pay any interest at all. Earning some interest is, of course, better than earning none at all.
However, if an account has a monthly fee, it’s probably not worthwhile. Monthly fees on savings accounts often offset the interest you earn. Even if it’s a small fee of $1 or $3 per month, you likely won’t even earn that much in interest — so having the account open will cost you money.
Why are interest rates so low?
Interest rates on savings accounts are set by banks, which use the interest they pay to attract customers.
Banks take the deposits from savers and use the funds to back loans to other customers. They profit off the difference in the interest rate they charge and the interest rate they pay their members.
For example, a bank may pay 0.21% APY on a savings account and loan out money at 3% for an auto loan.
If this is the case, why are savings accounts APYs so low? The national average is just 0.21% APY.
There are a few reasons for this:
Low loan interest rates: Banks set their loan rates based on current market conditions. When interest rates are low, they charge less interest to customers — and, therefore, must pay less to savers.
Minimal competition among banks: According to research by Itamar Drechsler, a professor of finance at the University of Pennsylvania, big banks no longer have much competition. They have won over the majority of savers, so they don’t necessarily need to offer higher interest rates to attract new members.
Increased savings rates: Americans are saving more than they normally do and have been since the start of the COVID-19 pandemic. This means that banks have more money on hand to lend out.
Federal Reserve monetary policy: Normally, banks are required to have a certain amount of funds in reserve in order to lend out money. This is determined by the reserve requirement ratio (RRR), which refers to the percentage of deposits that a bank must keep on hand instead of lending out. For example, if the RRR is 20%, that means that a bank must keep $2,000 in deposits in order to lend out $10,000. In response to the COVID-19 pandemic, the Federal Reserve lowered the RRR to 0%. This essentially allows banks to lend out more money than they could before.
The overarching reason for low rates is this: banks don’t really need your money, so they don’t offer a high interest rate. Many traditional banks have more money on deposit than they actually need to fund loans, so they have little incentive to raise rates.
Alternatives to traditional savings accounts
There are various savings accounts, some of which offer higher interest rates. As discussed above, standard savings accounts pay very little in interest — but there are alternatives that are well worth considering.
Tellus high-yield savings
Tellus is a smart savings platform that consistently pays 3.00-4.50% APY on your savings, with the option to earn up to 6.00% APY by claiming free Boosts every day (think of these as ‘APY power-ups’).
You can set up a Tellus account in 3 minutes or less with no credit check, and easily transfer money from your existing bank checking or savings account. From there, your money will start earning compound interest daily!
Tellus is not a bank, and funds are not FDIC insured. However, every dollar savers deposit is backed by real assets - not stock or crypto. Learn more about how Tellus works here, and how you can start earning passive income on your savings.
Certificates of deposit
Certificates of deposit (CDs) are savings products available from most banks. They lock up your money for a set period in exchange for a higher interest rate.
For example, you could buy a 6-month CD that pays 1% APY. Your money would stay on deposit for 6 months and earn 1% APY. There are fees for early withdrawal.
CDs are available in terms ranging from 3 months to 5 years or more. If you know that you won’t need access to your funds for a certain period of time, CDs can be a decent option.
Tellus offers a similar product called Vaults, where you can lock-in a higher APY by locking up your money for a fixed period.
For now, you can choose between four Tellus Vaults:
High-yield savings accounts
High-yield savings accounts are just like normal ones, but they offer a higher interest rate. They are often offered by online banks, which have lower operating costs and can pass more of those savings onto savers.
The only real downside of high-yield savings accounts is that they generally require you to open an account with a new bank. Your existing bank likely does not offer high-yield savings accounts, as most of these accounts are offered by online banks and specialty banks.
There are various other options to consider as well. These are covered in more detail in our types of savings accounts article.
- Student savings accounts are reserved for students. These typically offer no monthly fee and no minimum balance.
- Money market accounts are like a hybrid between a savings and checking account. They come with a debit card and check-writing features but pay a relatively high interest rate.
- Specialty high-yield accounts are not FDIC insured and are powered by various advanced strategies. For example, there are accounts that participate in cryptocurrency lending.
- Health savings accounts offer tax perks when saving for future healthcare expenses. These are only available to those on certain types of high-deductible health insurance plans.
- Investment and retirement accounts are typically used to invest in stocks and other assets. These are not technically savings accounts but are worth considering for long-term financial goals.
All of these account types have pros and cons and are worth considering for certain goals.
Ultimately, savings accounts are worth it — but it’s wise to choose the account carefully. If you find one that offers a good yield, you can earn some extra interest on your savings.
For many savers, Tellus is an excellent option. Tellus is a smart savings platform that lets you earn between 3.85% and 5.12% APY on your savings. Tellus is backed by real estate and has no exposure to risky assets like stocks or cryptocurrency. You can withdraw your money at any time, and interest is paid daily.
Try Tellus today (and enjoy a 5.00% APY on your money for 7 days when you use code “BLOG5” when signing up).