This is a sponsored post written by me on behalf of Money Under 30 for PrizePool.
According to the FDIC, in December 2021, the national average annual percentage yield for savings accounts is 0.06%.
Not 6%, not even 0.6%. 0.06%.
That means that if you deposit $10,000 today and let it cook for 12 months, you still won’t have enough yield next year to buy a single Chipotle burrito.
With such dismal annual percentage yield, does that mean all savings accounts are kinda pointless?
Not all of them.
Remember, 0.06% is just an average. There are “high-yield” savings accounts out there that can actually generate some respectable interest. Some have generous signup bonuses. Heck, there are even savings accounts now that automatically enter you into prize pools for up to $10,000 every time you save.
Understand what “high” interest is
Savings accounts aren’t designed to make you rich, but rather, give you an alternative to your checking account that trades a little liquidity for a little interest.
Liquidity is how quickly your investment can be converted to cash. You can withdraw from most savings accounts six times a month, making them highly liquid. Stocks and crypto you have to sell first, making them less liquid.
High liquidity is what makes savings accounts a good place to stash an emergency fund. It earns more interest than your checking account, and unlike other investments, you can pull cash out of it at a moment’s notice.
This also makes it right for short-term goals like paying down debt and finally saving for that vacation.
Why are savings account annual percentage yields so low these days?
The short answer is that loans are so cheap these days that the big banks don’t have the profit to split with you.
In March 2020, the Federal Reserve lowered the Reserve Requirement Ratio (RRR) – making loans much cheaper to keep the economy moving during the pandemic. But when the cost of loans gets insanely cheap, banks have less profit from lending to share with their savings account holders.
They also don’t need to share their profits with you, because big banks aren’t using savings accounts to attract clients.
But small banks are, and there are still some excellent savings account options out there. So how do you maximize your savings account rates?
Focus on high-yield accounts only
A high-yield savings account (HYSA) is exactly what it sounds like: a savings account with an annual percentage yield much higher than the national average.
“High-yield” or is marketing speak for “actually viable.” When a bank offers a high-yield savings account, it’s their way of saying we’re actually trying.
When you search “high-yield savings account” versus “savings account,” it filters out the banks that simply aren’t trying, or worse – really don’t want you to open a savings account.
So, since “high-yield” is synonymous with “worth your time,” it’s best to start your search with these terms.
Go local – or online
As stated, most big banks don’t really want to open a savings account for you. They’ll look at you funny like you’re ordering a salad in a steakhouse.
Instead, credit unions and neobank aka online banks are better options for finding high-yield savings accounts.
Credit unions are nonprofit by definition. These small, local, member-owned and controlled financial institutions exist to serve you and give you the lowest monthly fees (if any) and maximum rates.
Therefore, your local credit union is much more likely to offer you a high-yield savings rate of 0.25% or higher.
Read more: Credit Unions Vs Banks: Think Local, Save Money?
Neobanks are tech-driven, online-only banks that have begun cropping up in recent years. Due to having low overhead (no branches, etc), neobanks are able to offer top-shelf rates and almost zero fees at all.
In stark contrast to the big banks, neobanks aggressively compete to offer the best high-yield savings accounts.
Look for sign-up bonuses
It’s rare, but sometimes, banks, credit unions, or neobanks will offer a signup bonus if you can deposit a certain amount into a new savings account.
It depends entirely on which bank you choose, but many banks require a couple hundred or thousand to be deposited before you can earn the bonus. And bonuses typically are a couple of hundred dollars. So, if you’ve got the money already on hand, stick with an account that will reward you for that.
Read more: Best Savings And Checking Account Promotions, Deals, And Offers
Don’t fall for monthly fees
If you were aware that savings accounts don’t generate much interest, and were simply looking to put a few hundred bucks aside for a rainy day fund, that’s all good.
But be a little cautious.
If there’s anything a big bank deplores more than a savings account, it’s a savings account with a low balance. Presumably, small rainy day funds just aren’t worth the overhead for big banks to maintain, which is why they charge – you guessed it – a “maintenance fee” aka monthly fee.
To their credit, the big banks will give you lots of ways to waive your monthly fee. You’ll typically see a monthly fee schedule (anti-fee schedule?) like this one on the landing page for the savings account.
Maintenance fees are like mousetraps. On paper, they’re very easy to avoid; but once you forget about them, you’re almost guaranteed to step on them.
A common fee-triggering event is when you withdraw from your savings account, and the remaining balance falls now below the minimum threshold. After a few months, your $400 rainy day fund becomes $360, $320, and so on.
So what’s the best way to avoid maintenance fees? Why, simply open a savings account with a bank that doesn’t charge them.
- Most big banks charge maintenance fees for savings accounts.
- Some credit unions do.
- Almost zero neobanks charge them.
The neobanks typically don’t charge maintenance fees for savings accounts for two reasons:
- They don’t need to since they have such low overhead, and
- They can’t afford to if they want to attract clients in a hyper-competitive lending space
Even banks with unique offerings (like PrizePool, which automatically enters you into a raffle for cash prizes), never charge you a penny for opening or maintaining a savings account.
Look for a gamified savings account with ways to multiply your cash
What if I told you that if you put $500 in a savings account today, it could earn $10,000 in a single month?
You just have to be really, really lucky 🙂
In lieu of offering 0.50% vs 0.40% annual percentage yield, some neobanks have gotten clever with their approach to making saving more fun. There are neobanks that increase your interest rate based on how many miles you run, others that have savers compete on a leaderboard to see who saved the most this month, and more.
Gamifying the act of saving is one thing, but if you can make it significantly more lucrative also, that’s a much more compelling value proposition.
At present, nobody does this better than PrizePool.
PrizePool is a high-yield savings account with a twist. To start, there’s no minimum balance requirement, and you’ll earn a nice 0.30% annual percentage yield on every dollar you deposit – five times the national average. Plus, it’s worth mentioning again that PrizePool doesn’t charge a dime in fees – no monthly maintenance fee, transfer fee, nada.
Here’s the tasty twist; for every dollar per day you have deposited with PrizePool, you get one ticket for a weekly drawing. And in each four-week period, PrizePool awards thousands of cash prizes to lucky savers worth $50,000 total.
At the end of the month, one lucky saver will win a $10,000 grand prize. There’s a new $10,000 winner every month, so if you have a PrizePool HYSA for all four years of college, that’s 48 chances to win new car money (or a big dent in your student loans).
Drawings are made for the other prizes every Friday at noon, so your savings account (of all things) could play a big role in starting off your weekend right.
Even if you don’t consider yourself to be a lucky person, PrizePool still makes sense. For one, it layers on an extra incentive to save more and spend less. Two, even if you have $10,000 saved with PrizePool for a year, and you only win a single $50 prize, that’s the equivalent to increasing your overall annual percentage yield by 0.50% for the year – making your total annual percentage yield 0.80% – or way higher than the next guy.
Save more, earn more
This may seem obvious, but the more money you put aside in your savings account, the more you earn.
Like Audrey II, the peckish plant in Little Shop of Horrors, your high-yield savings account grows exponentially the more you feed it.
But beyond generating interest and avoiding fees, there’s a much more important reason you should continue contributing to your savings account each month:
Even if you only put $5 away each month, you’re practicing an invaluable skill that will make you rich.
Many of my wealthiest friends don’t know a whole lot about stocks or crypto. Heck, some of them didn’t even work super hard during their careers.
But what made them rich is the discipline and skill to put aside money each month. Granted, they eventually branched out to use more tools than just high-yield savings accounts, but they all started in the same place – saving a few bucks per month in their 20s.
You can read all about the (surprisingly few) steps they took to get rich in my feature How The Rich Get Rich (And How You Can, Too!).
Consider the alternatives
Savings accounts are generally considered to be no-risk investments because just like your checking account, they’re both highly liquid and FDIC-insured for up to $250,000.
But, as with anything, it’s worth at least considering your other options for where to stash cash.
Low risk: certificates of deposit (CDs) and money market accounts (MMDAs)
CDs are like savings accounts where you agree not to touch your money for a predetermined amount of time. CD terms usually run between nine months and five years, and because you’re agreeing not to touch your money, your annual percentage yield is a tick higher – 0.50% to 1.00%.
CDs are extremely safe, but their inherent “risk” is that they’re illiquid. They’re only a good idea if you know you won’t need the cash for a predetermined amount of time.
Money market accounts aka money market deposit accounts (MMDAs) share more direct DNA with savings accounts. Traditionally, money market accounts have had significantly higher initial deposit requirements than savings accounts ($10,000 versus $100) and offered higher interest rates in return.
These days, however, both the initial deposit and the average APY of a money market account have come down, making many indistinguishable from high-yield savings accounts. They often still have minimum balance requirements ($1,000+) before fees trigger, so they’re a pinch riskier.
Check out Best Money Market Accounts – Better Flexibility And Higher Interest Rates.
Medium risk: index funds
Index funds are like baskets of stocks that are designed to reflect the performance of an entire market index like the S&P 500. They’re kinda hard to summarize in the size of a Tweet, but the key takeaway is this: they’re generally considered to be low-risk, high-yield investments producing a reliable 5% to 10% annual percentage yield year to year.
Check out Why Index Funds Cost Less, Reduce Risk And Make You A Better Investor.
High risk: stocks
Yep, individual stocks are higher risk than you think. That’s why even hedge funds and Warren Buffet still lose money sometimes.
Stocks are difficult to invest in effectively, which is why many folks recommend letting a robo-advisor choose your investments for you over day trading.
But if you’re keen on buying your own shares, power to you. Check out our guide How To Invest In Stocks – The Beginner’s Guide To The Stock Market.
Even with hohum interest rates, savings accounts are still valuable tools for anyone looking to manage their money wisely. They help you practice saving while earning a trickle of interest in a zero-risk environment, and your money is always ready for plucking in case of emergency.
Plus, if you shop smartly, you can find a high-yield savings account with an annual percentage yield of 0.30% or higher.