When you have the diligence to save money, it's nice to be rewarded with a high interest rate. Unfortunately, savers have been getting paid next to nothing for over a decade.
Lately, however, the average savings account interest rate has been increasing—by a lot. Here's a closer look at today's average savings account interest rates and why banks change their rates.
Average savings account interest rates
So far for 2023, the average savings account rate across all financial institutions is 0.36%. However, rates have consistently been ticking upward this year. For the month of April, savings account rates average 0.39%.
That means if you put $10,000 into a savings account, you’d have an extra $39 after one year.
While this might not seem like much, it’s important to note that savings accounts are paying much more now than they were in years past. For example, the average savings account rate this time last year was just 0.06%.
Certain banks are offering well above the national average as well. Some of the best rates can be found on high-yield savings accounts, which currently offer around 4.5%–5%.
How do banks set their savings account rates?
Banks set deposit rates—including savings accounts—based on a combination of market rates and competitor benchmarking, according to Ben Swinney, senior vice president and treasurer at Texas Security Bank. For example, he says, a key market rate that impacts the rates banks pay on deposits is the Federal funds rate. “The Federal Funds Rate is the interest rate at which depository institutions, such as banks and credit unions, lend reserve balances to each other on an overnight basis,” Swinney says. He adds that this rate is determined by the Federal Open Market Committee (FOMC), a branch of the U.S. Federal Reserve, which meets eight times per year.
“Setting deposit account rates is a combination of art and science,” says Gene Grant II, CEO and founder of LevelField Financial Services. He explains that in an increasing interest rate environment, a bank generally won’t increase savings account rates in proportion with the increase in the Fed’s rate. “This is because the bank knows that in general, deposits are ‘sticky’ and only a marginal subset of customers will switch banks purely for deposit rates,” Grant says. “The bank performs a calculation to estimate the increase in deposit rate that will cost the bank the least for an acceptable amount of deposit outflow.”
In a decreasing interest rate environment, the rates tend to come down much quicker, Grant notes.
Individual banks may also choose to raise or lower their savings account rates based on the amount of deposits it needs to fund its loan portfolio. When banks need more deposits, they may increase interest rates to attract more customers. “A bank that is growing and making more loans will tend to increase deposit rates so that they have the funds to lend, and banks reducing the balance sheet tend to pay lower rates,” Grant says.
Banks also consider the spread between the interest they pay on deposits and the interest they earn on loans when setting savings account rates. To maintain profitability, they have to strike a balance between offering competitive rates to attract deposits and keeping their lending rates high enough to generate income. So at times, banks may adjust their savings account rates to improve profit margins.
Average savings account interest rates over time
Over the past decade or so, savings account rates have remained relatively flat. Following the 2007–2008 financial crisis and Great Recession, the Fed slashed the federal funds rate to 0% in order to make borrowing more attractive and spur economic activity.
Rates were at their lowest between 2013 and 2017, when the average savings account rate sat at 0.6%. Rates began ticking upward in 2018 as the economy continued to improve, only to be throttled once again by the COVID-19 pandemic and sharp (but short) recession that occurred as a result. By 2021, the average savings account rate dropped to 0.5%.
Things changed in March 2022, when the Fed began raising rates in response to skyrocketing inflation—a side effect of . Over the past 15 months, the Fed has raised rates 10 times, and may do so again. As a result, savings account rates rose sharply. Today, the average savings account rate is 0.39%.
View this interactive chart on Fortune.com
How to maximize the interest on your savings account
- Opt for a high-yield savings account. Not all savings accounts are alike. Despite the relatively low national average for interest rates, certain savings accounts pay much higher yields. With a high-yield savings account, you can earn
- Consider a money market account. The accounts work like a checking-savings combo. They pay higher rates than the typical savings account, especially for higher balances. Plus, they often come with debit cards and check-writing capabilities. However, you may need to limit your withdrawals and/or maintain a minimum balance in order to avoid fees.
- Look out for bank bonuses. In addition to competitive interest rates, some banks also entice new customers by offering bonuses to those who sign up for an account. So if you’re in the market for a new savings account, shop around and find out if any banks are currently offering bonuses. Keep in mind, you may need to have the account open for a certain period of time before you’re eligible to receive the bonus.
- Be sure your money is protected. Chasing high interest rates isn’t worth it if your money isn’t safe in the event of a bank failure. Always work with banks that are protected by the Federal Deposit Insurance Corporation (FDIC) or credit unions backed by the National Credit Union Administration (NCUA). And always keep a maximum of $250,000 on deposit with any one financial institution so that your funds are fully protected.
The takeaway
It’s important to understand that a savings account is best used for your emergency fund and short-term savings goals. Earning higher interest can help your savings grow even faster, and opting for high-yield accounts at FDIC- or NCUA-protected institutions will ensure that your money is safe.
That said, your savings account should be one component of a well-rounded financial plan. In addition to other safe harbor investments such as CDs and Treasury bills, you’ll need to put your money in higher-risk (and higher-reward) market investments such as stocks, bonds, and mutual funds in order to grow your wealth and meet long-term savings goals such as retirement.
