The APY, or annual percentage yield, describes the actual interest you earn on your savings account, taking into account how often the savings institution compounds the interest. For example, if an institution compounds your interest daily, you will earn more in a year than if it compounds the interest monthly or quarterly. In certain cases, the amount you keep in a savings account affects your APY, or actual interest earnings.
Opening and Balance Requirements
You must meet minimum balance requirements to open a particular savings account. If you do not have a minimum, for example $500, you cannot open the account and receive the advertised rate. These days, opening requirements are usually quite low, even $1. However, some savings institutions charge a maintenance fee every month if you balance falls below a certain minimum. These fees, which cost as much as $10 per month, can quickly eat up your interest earnings and even reduce your balance. If you fees exceed your interest earnings, you effectively have received negative interest.
Tiered bank accounts offer different interest rates for different levels of deposits, allowing you to increase your APY by keeping a large balance. Although tiered accounts are more common for certificates of deposit and money market accounts, sometimes credit unions and banks also offer them for savings accounts. For example, in a tiered savings account, you may receive a lower interest rate up to $20,000. Between $20,000 and $50,000 you receive a higher rate, and over $100,000, you receive yet a higher rate.
Banks and credit unions sometimes offer special promotions which increase the APY on an account. For example, they may offer a higher interest rate if you keep a minimum of $1,000 in your savings account. In addition, they may offer a cash incentive for opening a savings account with a large balance, for example $10,000. The special incentive only increases your APY for the year in which you receive it. Other banks offer incentives such as gift cards and free electronics for opening accounts, but frequently these incentives apply only to checking accounts.
You can earn a higher APY by shopping for the best rates and switching to a money market deposit account or certificate of deposit. These accounts usually earn more than simple savings accounts. Both money market accounts and CDs sometimes also offer tiered rates paying more for large balances. If you need access to your money, online money market accounts usually have the best rates, according to Jane Bryant Quinn, author of "Making the Most of Your Money Now." If you can afford to tie up your money, CDs of one year or longer usually pay more than a simple savings account. Check current market rates for CDs and money market accounts online at Bankrate.com. Look for the Federal Deposit Insurance Corporation or National Credit Union Association logo before you invest to keep your savings insured.
- Federal Deposit Insurance Corporation: 6500 -- Consumer Protection
- Bankrate.com: Savings Accounts
- BusinessDictionary.com: Tiered Rate Account
- "SmartMoney"; Banking Perks Are Getting Bigger; May 2005
- MSN Money: Open a Checking Account, Get $100
- "Making the Most of Your Money Now"; Jane Bryant Quinn; 2009
- Jupiterimages/BananaStock/Getty Images