When it comes to put money into a savings account, you want to get the best interest rate possible. Your interest rate (called an annual percentage yield – APY) represents what your bank is paying you to use your money. When you deposit money into a bank, it doesn’t just sit there; the bank lends it out to others and earns interest on it. So the bank pays you interest – much less than it gets by loan your money to others – as a way of encouraging you to keep your money with the bank.
How Savings Account Interest Rates are Set
Banks have a great deal of say in what interest yield they pay to depositors. However, banks are businesses. They exist to make a profit, so they want to pay as little to you as possible. Banks profit on the difference between what they pay you in interest, and the interest they receive from borrowers. Banks also have to take into account the fact that it costs money to administer your account.
Banks also have a guide as they determine what yield to offer on your savings account: The Fed Funds Rate. The Fed Funds Rate is a target interest rate that affects the interest that banks pay each other when they lend and borrow money overnight. It is based on the fact that banks are required to have a certain percentage of their deposits in reserve. Banks that have “extra” money can lend funds to those who come up short. It’s known as overnight lending, the interest charged is guided by the Fed Funds Rate
Members of the Federal Reserve’s Federal Open Market Committee meet regularly to discuss what should be done with the Fed Funds Rate – whether it should rise or fall. This directly affects your savings rate. When the Fed Funds Rate falls, so does your savings yield. However, as the Fed raises interest rates (usually in times of growth in order to limit inflation), your savings yield will rise as well.
Looking for the Best Savings Interest Rate
If you want the best interest rate on a savings account, you should shop around. Some financial institutions offer more competitive rates in order to attract more depositors. After all, the more deposits a bank has, the more it can lend out at higher interest rates. Shop around for a savings account that offers a good rate. Rates at a brick and mortar bank are likely to be quite low, however. You might get better rates by looking at online savings accounts – even though you will probably sacrifice a degree of accessibility.
You should be careful when you open a savings account. Make sure you understand the terms. In order to get the best rate, you may have to maintain a minimum balance. You will also be limited as to the number of withdrawals you can make. The rules set forth by the Fed limit savings account withdrawals to six per month. However, banks can choose to limit that number to three or four. If you exceed the limit, you could end up with hefty fee – or you could have your savings account revoked.
Shop around for the best rate, and make sure you understand all the terms and conditions. That way, you will get the best return possible for your savings account deposit.