How much money you could be missing out on with a low-APY savings account

There’s some comfort in knowing that your money is in the bank down the street. But in the era of Federal Reserve rate increases and brick-and-mortar banks offering yields that are much lower than yields at many online banks, this comfort may be costing you money. Generally, Federal Deposit Insurance Corp. (FDIC) online banks offer savings accounts with much higher annual percentage yields (APYs) than brick-and-mortar banks.

What does APY mean?

APY stands for “annual percentage yield” and refers to the rate of return a bank of account earns in a year. APY includes the effects of compound interest, which means interest is earned on both your principal and the accumulated interest.

APYs on checking and savings accounts are variable, meaning the bank can raise or lower them, at will. Typically, banks with high-yielding accounts will increase APYs when the Federal Reserve raises rates, and lower APYs when the Fed decreases rates.

How a low APY can affect your savings

Let’s say you have saved $10,000. That’s a great accomplishment, but if it’s earning the national average of 0.58% APY, you’re not getting the best return on your savings. Some of the most popular big banks pay even less, at 0.01%.

There are many opportunities to earn a much better rate of around 5% APY or higher.

An account with $10,000 that pays 0.58% APY earns about $58 of interest in a year. In a high-yield savings account or money market account paying 5% APY, you’d earn around slightly more than $500 in a year. And if you continue to add to your balance, you’ll earn more from compounding interest over time.

These calculations assume that the APY will stay the same for a year — which is unlikely to happen — and that you’re not withdrawing or adding any money.

Let’s say your balance isn’t quite as high as $10,000. These days, banks offer high-yield savings accounts paying up to around 5.25% APY with minimum balance requirements as low as $0. And while the earnings won’t differ as much on low balances, you can continue adding to your balance over time to maximize the higher yield.

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