Having extra cash in savings can make it easier to weather life’s unexpected costs, whether it’s a dental bill, a car repair, or a stretch of unemployment. But where you keep your savings matters as much as how much you set aside.
Many Americans are earning almost nothing on their savings, even those with a significant amount of cash stashed away. Keeping your savings in a traditional savings account instead of a high-yield savings account (HYSA) is a common, costly mistake that could mean you miss out on hundreds of dollars in interest each year.
Hanna Horvath, a certified financial planner (CFP) and creator of Your Brain on Money, a newsletter about the psychology behind financial decisions, suggests history could play a big role.
“Savings rates were close to zero for most of the 2010s, so many people formed their habits at a time when interest barely mattered. When rates rose in 2022 and 2023, many big banks kept paying very little, so a lot of people never noticed that anything had changed,” she said.
Why the interest rate on your savings account matters
Most traditional savings accounts offered by brick-and-mortar banks have low interest rates. While rates vary by bank and product, many offer a meager annual percentage yield (APY) of 0.01. According to the FDIC, the national average rate for savings accounts is 0.38 percent APY.
Meanwhile, many online banks offer HYSAs with APYs more than 10 times the national average. While rates vary, many currently offer 4.0 percent APY or more. At first glance, that may not seem like a big deal. But the difference adds up. Sticking with a traditional savings account could mean missing out on hundreds of dollars in interest each year on a $10,000 balance.
How much more could you be earning?
The table below outlines estimated interest earnings for different savings balance levels to illustrate how much interest you could be missing out on.
The psychology behind not making the switch
The math is clear: you’ll earn more by keeping your savings in a high-yield savings account. So why aren’t more people making the switch? Horvath said people tend just to rely on the status quo.
It doesn’t help that the cost of staying put is invisible. “If your bank charged you a $30 monthly fee, you’d probably be furious and leave,” Horvath said. “But that’s roughly what you can give up by keeping $10,000 in an average savings account instead of a high-yield one, and since it never shows up on a statement, you may not notice it.”
Familiarity also plays a role. “We tend to confuse familiar with safe, so the bank your parents grandfathered you into can feel more secure than an online bank you’re less familiar with,” she said. “But as long as both are FDIC-insured, your money has the same protection.” She recommends verifying that any bank you’re considering is FDIC-insured.
Horvath said that because savings carry emotional weight, money often makes us feel secure, so the thought of moving it can feel scary. “But you may be paying hundreds of dollars a year for that feeling, and because no one bills you for it, you never stop to ask if it’s worth it,” she said.
Why switching banks feels harder than it is
Even when people understand they’re leaving money on the table, switching banks can feel like more of a hassle than it is. “The hassle of switching happens today, while the reward can build up slowly over years,” Horvath said.
“The word ‘switching’ is part of the problem,” Horvath added. “People picture having to close all of their accounts, move their direct deposit, and redo all of their autopays. In most cases, you can keep your checking account where it is and link a new savings account to it in a few minutes.”
Another barrier that could keep you from making a change is feeling pressure to choose the best account. Horvath said the number of options can cause one to feel overwhelmed. “You search for HYSAs, see 15 options with slightly different rates, and a small task turns into a research project,” she said.
Her advice: don’t overthink it. “Stop trying to find the perfect one,” Horvath said. She said the differences between two good HYSAs are tiny compared with the difference between either one and a traditional savings account. “Pick one that’s FDIC-insured and has no fees,” she said.
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