The national average interest rate for savings accounts is just 0.06%, according to Bankrate data from November. Yikes. The good news? You don’t have to proceed with a rate that low. First up, look to online banks, as many offer higher rates — sometimes four or five times higher than average — than old school brick and mortar ones, experts say. LendingClub is offering a 0.60% APY for accounts with at least $2,500, and Marcus by Goldman Sachs offers an 0.50% APY with no minimum, as does Chime, SallieMae, Synchrony and a handful of others, as you can see below.
Of course, these rates aren’t going to make you rich. And if you’re willing to jump through more hoops, you can earn more. “Varo is one of the banks offering 3% but be sure to check out their requirements to qualify as certain conditions must be met. The same applies to Aspiration, which is not a bank but is paying 3% to 5% depending on the type of account you obtain,” says CFP Board Ambassador Luis F. Rosa. With Varo, for example, you start by earning 0.50%, but then can quality to get a 3% APY if you receive total direct deposits of $1,000 or more each qualifying period, keep a daily savings balance of $5,000 or less the entire calendar month, and keep your bank and savings account balances above or equal to $0.00 the entire calendar month.
Seeing these rates, some people may ask: Is it even worth saving right now? Yes, in some circumstances, experts say. “Emergency savings or funds that you’ll need in the short term should be placed in an account that is easily accessible without penalties or tax consequences. Since the primary goal is accessibility and safety of principal, it’s okay to trade a low interest rate for that,” says Rosa, who adds that short-term means in roughly a year or less. Adds financial planner Scott Ward of Johnson+Sterling: “Since unplanned events like car repairs and out-of-pocket medical bills can occur, the first step in a sound financial plan is to set up an emergency fund. While it would be nice to get an attractive yield from your bank on the emergency savings, the primary objective is to have the funds handy when the uh-oh happens.” A reasonable goal, Ward says, is to have between three and six months’ worth of fixed expenses set aside in an emergency fund.
If your savings goals are longer term, like a year or more away, you may want to think differently. Robert Conzo, CEO and managing director of The Wealth Alliance, calls out Series I Savings Bonds from the U.S. government, which currently pay 7.12% for bonds purchased through April 2022 and have a minimum term of ownership of one year. You may also want to consider a CD as part of your savings strategy if you don’t think you’ll need all of your money at once or if you don’t need access to the money until after the CDs maturity. “Depending on the goals for your financial plan, it may make sense to look into some investment and CD strategies for expenses that will likely occur beyond the next two years,” says Ward. If you have money saved for a down payment of a home but you’re not planning on buying the home until 1 to 2 years from now, Rosa says, “You can consider a CD with a short term, like 9 months to a year, provided the interest rate is higher than the rate being offered on a high yield savings account.”
CDs are also a good option if you can’t afford to be risky with your investment. Cory Phillips, financial advisor at Fort Pitt Capital Group says, “Within a 2 year time frame, you can compare CD rates to money market funds or other, safer, short-term investments which are all viable options with a short amount of time until your funds are needed. If you have a longer time frame than about 3 years, your options keep growing.”
However, as the time increases for you to keep your money invested, making a case for a CD being a good investment may decreases. If your goal is far off, investing is likely the smarter play. “Although the money in your bank account is safe because of FDIC insurance, it loses purchasing power over time as the years go by due to inflation,” says Rosa. This means, if you leave money in the bank earning a low interest rate for years, you’ll be able to buy less with that money in the future and the little interest that you do earn is also taxable. “It’s a good idea to start investing in something that over time is likely to provide a higher rate of return in order to combat the effects of inflation and taxation on the earnings,” says Rosa.
Ultimately, Conzo says successful savings depend mainly on one’s ability to save and how diligent they are about it. “For long-term goals, such as retirement savings, we recommend setting up an automatic savings plan to a 401(k), IRA or investment account, by which you invest a set dollar amount monthly to take advantage of dollar-cost averaging. As my grandfather used to say, ‘If you save $0.50 cents of every $1 you earn, you’ll be okay,’” says Conzo.