What Is a Good Interest Rate for a Savings Account?

The current average savings APY is 0.42%. Since the Federal Reserve began increasing the federal funds rate last March, the rates for saving accounts interest rates have increased by 600%, from 0.06% to 0.42%.The interest rate on 1-year certificate of deposits (CDs), typically one of the highest-yield savings vehicles, currently averages 1.72%.

Here are the average rates paid by all insured depository institutions and credit unions for which data is available, for the most common banking products.

Online banking is typically the best way to find a higher interest rate for your bank account. The best rates for savings accounts typically come from online-only banks. An online bank is able to offer higher rates since it does not have the same costs as brick-and-mortar banks. What is a good interest rate for a savings account?

While the average savings rate is 0.42%, the best high-yield savings accounts offer an APY ranging from 4.00% to 5%.

A savings account's annual percentage yield, or APY, is the amount of interest you earn in a year. Earning a higher APY can make a significant difference. For example, $5,000 in an account offering the 0.42% national average would earn $21 per year. The same amount in an account earning a higher rate of 5% will earn $250 per year.

The beauty of compounding interest means this gap will only widen as time goes on. You should look for banks that offer high annual percentage yields. The higher the account's APY, the faster your savings will grow.

There are two ways to calculate interest: simple and compound. Simple interest is where your account will grow a fixed percentage of the principal amount every year. So a $5,000 account earning 5% in simple interest would gain $250 every year. An example of this type of account is an account invested in bonds.

Compound interest differs in that the interest is reinvested and you earn interest on that as well. Compound interest essentially is interest on the interest. Using the same example, with compound interest, you receive the $250 payment after the first year. That amount is reinvested and for the second year, you earn 5% on $5,250, which is $262.50.

The difference between simple and compound interest is massive. This table shows the difference on a $10,000 investment portfolio at 10% interest over time:

In the example above, we calculated interest on an annual basis. Savings account interest can be paid out daily, monthly, quarterly, or yearly. The amount of interest earned is calculated at the time it is paid out, based on the total balance of your account. This includes both the initial deposit and any interest you've earned so far.

For many savings accounts, interest is calculated on a monthly basis. Using the $5,000 example above and applying monthly compounding, the amount that earns interest grows by another 1/12th of 5%. At the end of the year, the deposit will have grown to $5,255.81 versus $5,250. The compounding frequency makes a difference.

Learn More: Is the Interest Rate for Savings Accounts Monthly or Yearly?

How much interest you earn will vary a lot depending on the bank and account type. It is important to shop around to find the best savings accounts. Online-only banks tend to have better rates since they do not have to pay the same overhead costs as brick-and-mortar banks. It is also important to know that since the APY on a savings account is variable, the rate will fluctuate.

An online high-yield savings account may offer higher rates, and credit unions may as well. CD and money market accounts typically offer higher rates than savings accounts. These could also be alternatives to try for a better rate.

If you find a better rate, ask your bank and see if it can match or beat it. If not, consider switching to another bank.