Should I Shop for Savings Accounts That Earn 3% APY?

Should I Shop For Savings Accounts That Earn 3% Apy?
Getty Images

Portrait of young confident young businesswoman in a loft style work environment. Mixed race female staff of a tech startup. She is wearing smart casuals.

After recent rate increases made by the Federal Reserve, some savings accounts are paying more than 3% annual percentage yield, or APY. This rate is among the highest you can find for a savings account right now, and it’s worth shopping around for one.

Here’s what to know about why rates are increasing and how your money can earn some of the best yields around.

Is 3% a high rate?

In a word, yes. The national average savings rate as of October 2022 is 0.21% APY, according to the Federal Deposit Insurance Corp. That’s a good deal higher than in the past — it was a paltry 0.06% in January 2022. But high-yield accounts typically earn many times more than that average, with the best high-interest accounts topping 3% right now.

What does this difference mean for you? Let’s say you put $5,000 in a savings account that earns 0.21% APY. It’ll grow by only about $11 after a year. But put those funds in a high-yield savings account that earns 3%, and your bank balance will increase by about $153. That’s a nice chunk of change for no extra work on your part.

Over time, the interest on your money also earns interest. These earnings, known as compound interest, can boost your balance even faster. The higher your rate and the longer the time frame, the more your balance will grow.

Why are APYs increasing?

APYs are increasing in part because of inflation. When inflation is high, as has been the case over the last year, the Federal Reserve can step in to try and bring it down by increasing the federal funds rate — the rate banks use to borrow money from other banks. In 2022, the Fed increased the federal funds rate multiple times.

And the rate hikes are likely not over. In November, the Fed said in a press release that the committee that sets the rate “anticipates that ongoing increases in the target range will be appropriate” to reduce inflation to the committee’s targeted goal.

Higher rates increase costs for borrowers and can slow spending, which in turn can help lower inflated prices. But higher rates can also mean higher yields for savers. And that’s what’s happened this year, thanks to the Federal Reserve and good old competition.

Accounts that have historically offered some of the best rates tend to increase their APYs if their competitors increase rates, too. Some of these accounts have boosted rates several times over the last several months, and that’s why we’re in an environment where the best yields are now above 3%. This is a big jump from January 2022, when some of the best rates earned 0.50% APY.

Where do I find top savings accounts?

You’re not likely to find top rates at a nearby big bank. Consider looking at other options, including savings accounts available only online. Why? Online institutions don’t have to pay for physical bank branches, so they’re able to pass the overhead savings on to customers in the form of higher rates.

Is my money safe in a high-interest, online account?

As with traditional banks, funds in online banks are federally insured — up to $250,000 per depositor — by the FDIC. With credit unions, funds are federally insured by the National Credit Union Administration. If the institution were to fail, your money would be protected and accessible to you.

There are also financial technology companies that offer savings accounts that pay high yields. These companies tend to partner with FDIC-insured banks to hold customer deposits so the funds can still be federally insured. Before signing up, check the company’s website or reach out to customer service to find out if funds are federally insured.

What fine print should I look out for?

When looking for a savings account, be sure to understand any conditions or limitations. For example, some savings accounts pay rates that are even higher than 3% APY, but they limit the top APY to a certain amount, such as $500. Balances that are higher than the limit may earn a much lower interest rate. If the limit is lower than what you want to save, look elsewhere.

Other institutions will require that you open a linked checking account in order to earn the best savings rate. In general, look for an account with hoops you can easily jump through or ones without any hoops at all.

Are there fees?

Ideally, you won’t be giving any of your money back to the bank in fees. Some banks charge fees of around $15 a month, though they’ll waive them if you keep a minimum balance. Others won’t charge a fee, but have a minimum required balance to open an account. The best savings accounts earn a strong yield and have no monthly fees.

Are there other high-yield options for savings?

A high-yield savings account may be only one part of your money picture. One of the best places to earn interest is a different kind of savings account: a certificate of deposit.

With CDs, you won’t be able to withdraw funds for a specific time without paying a penalty — often a year or more — but the tradeoff for accessibility is high yields. Many CDs have rates of around 4% APY for one-year terms, for example. If you think you’ll need more frequent access to your funds, though, a high-yield savings account might be the better way to go, even if the yield might be lower.

More From NerdWallet