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💡 Main takeaway:
Key takeaways
- Big banks continue to pay almost nothing on savings, but even with a potential cut from the Fed this week, you can earn more than 4% by moving savings to a smaller bank or credit union.
- Even modest balances can earn hundreds more each year in a large savings account, a difference that compounds as your money grows.
- You don’t need to leave your primary bank to earn more: Linking a separate high-yield savings account is simple and safe, and may even improve your savings habits in the long term.
The huge gap between interest rates at the big banks and what you can earn at the perfectly safe smaller banks
With talk of an expected Fed rate cut in the headlines this week, savings rates are back in focus. But for most households, the bigger issue isn’t what the Fed will do next, but how much your current savings account is paying.
Many savers keep their money at Chase, Bank of America, or Wells Fargo simply because that’s where they actually bank. But this knowledge comes at a hefty cost: The three institutions pay close to zero 0.01% interest on standard savings accounts.
At this rate, even a $10,000 balance only earns $1 per year.
Meanwhile, many small banks and credit unions pay 4% or more on high-yield savings accounts, with the most competitive options offering 5.00% APY. While these rates will likely fall slightly if the Fed cuts interest rates this week, they will still pay more than the big banks by a wide margin.
Quick fact
Not every household name bank pays close to zero. Citi, Ally, Capital One, and American Express currently offer savings rates in the mid-3% range, a significant improvement over Chase, Bank of America, and Wells Fargo. However, these rates are about a full percentage point lower than what many small banks and credit unions currently offer.
If you assume that a big bank is safer, you’re not alone. But in reality, protection is the same everywhere. FDIC insurance protects deposits up to $250,000 per depositor and per institution, regardless of the size of the bank. NCUA-insured credit unions offer the same coverage. Small institutions are equally safe. The only real difference is what your savings can earn.
Why is this important to you?
If you keep your savings in a big bank, you could be missing out on hundreds of dollars in interest each year. Moving your money into a high-yield savings account is an easy way to earn more without changing where you bank day to day.
Here’s how much a near-zero bank interest rate would cost you today
So, how much would you lose by keeping savings in one of the largest banks? Even on a small balance, the gap compared to today’s high-yield accounts is significant. On larger balances, it’s amazing.
The table below shows how much you would earn in a year at 0.01% for a high rate of return, depending on your balance. To keep the comparison realistic, we used 4.25% for the high yield number — currently the 10th best rate in the nation — rather than the highest rate ever available.
You see, someone who has, say, $25,000 stored in a large bank account leaves more than a thousand dollars on the table over the course of a year. That’s roughly $90 a month.
| Large banks versus high-yield banks: The earnings gap after one year | |||
|---|---|---|---|
| balance | Earnings at 0.01% APY | Dividend at 4.25% APY | The difference after one year |
| $5000 | $0.50 | $212.50 | $212 |
| $10,000 | $1.00 | $425.00 | $424 |
| $15,000 | $1.50 | $637.50 | $636 |
| $25,000 | $2.50 | $1,062.50 | $1,060 |
| $50,000 | $5.00 | $2,125.00 | $2,120 |
Note that interest rates on savings accounts are variable, so they will likely decline with interest rate cuts by the Federal Reserve. But even with a modest decline, high-yield accounts will still pay much more than the near-zero interest rates offered by the big banks.
Even if you open a high-yield account, you won’t have to leave your big bank
You don’t have to stop using your big bank for daily banking if you open a high-yield savings account. You can keep your checks, credit cards, and bill payments right where they are while taking advantage of higher rates elsewhere.
A high-yield account can simply serve as a separate place to hold money you don’t need to access every day. Linking it to your existing checking account takes just a few minutes, and most transfers go through within one to three business days.
In fact, keeping your savings in a separate account can help you save more. When your savings aren’t next to your checking account balance, you’re less likely to spend that money on impulse purchases or everyday expenses. For many people, this small bit of separation makes a meaningful difference.
And remember: Moving your savings to a high-yield account does not change your federal protections. Deposits remain fully covered by FDIC or NCUA insurance – just as they are at your primary bank – while earning much more interest.
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