How different accounts grow your balance
The account that grows your money is one that pays interest — money the bank gives you for letting them hold your cash. A regular checking account typically pays nothing. A savings account pays a small percentage of your balance each month or year. A money market account pays more than savings but usually requires a higher minimum balance. A certificate of deposit (CD) locks your money away for a set time — three months to five years — and pays the highest rate, because the bank knows exactly how long they can use your funds.
The rate you earn depends on what the Federal Reserve sets as its benchmark rate, which changes throughout the year. When that rate is high, banks pay more on savings. When it drops, so do the rates they offer you. Right now, savings accounts at online banks pay between 4% and 5% annually, while big brick-and-mortar banks often pay less than 1%. The difference matters: on $10,000, you might earn $400 to $500 per year at an online bank, or $50 to $100 at a traditional bank.
The catch is that interest rates are not may provide. A bank can lower the rate it pays you at any time, with notice. If you want a locked-in rate, a CD is your only option — but you cannot touch the money without a penalty.
Key Takeaways
- Savings accounts and money market accounts pay interest on your balance, while checking accounts almost never do.
- Online banks typically pay two to five times more interest than traditional banks, because they have lower overhead costs.
- Certificates of deposit lock your money for a set period and pay the highest rates, but you lose money if you withdraw early.
- Interest rates change based on Federal Reserve decisions, so the rate you see today may be lower in six months.
- The account that grows your money fastest is whichever one offers the highest current rate and fits how often you need to access your cash.
Savings accounts: low barrier, variable rates
A savings account lets you deposit and withdraw money whenever you want, with no penalty. The bank pays you interest on whatever balance sits in the account. You can open one with as little as $1 at most online banks, though some traditional banks require $100 or more to start.
The tradeoff is that the interest rate is not locked in. Your bank can lower it whenever it chooses. Right now, online savings accounts pay between 4% and 5.25% annually, but this changes as the Federal Reserve adjusts its rates. A year ago, they paid less. In a year, they may pay more or less depending on economic conditions.
Savings accounts also come with withdrawal limits at some banks, though federal rules no longer cap how many withdrawals you can make per month. Check your bank's terms to see if there are any restrictions or fees for frequent transfers out.
Money market accounts: higher rates, higher minimums
A money market account is a hybrid between a savings account and a checking account. It pays interest like a savings account but usually comes with a debit card and check-writing ability, like a checking account. The catch is that most money market accounts require a higher minimum balance — often $2,500 to $10,000 — to earn the advertised rate.
If your balance drops below the minimum, the bank may lower your interest rate or charge a monthly fee. Some banks also limit how many withdrawals you can make per month, though this varies by institution. Money market accounts currently pay rates similar to or slightly higher than savings accounts — typically 4% to 5.5% annually — so the extra features may not be worth the higher minimum unless you plan to keep a large balance anyway.
Certificates of deposit: locked rates, early withdrawal penalties
A certificate of deposit is an agreement: you give the bank a sum of money for a fixed time period — 3 months, 6 months, 1 year, 3 years, or 5 years — and the bank pays you a set interest rate for that entire period. The rate does not change, no matter what happens to the Federal Reserve's benchmark rate. Right now, 1-year CDs pay between 4.5% and 5.5%, and 5-year CDs pay between 4% and 5%, depending on the bank.
The tradeoff is that you cannot touch the money without paying a penalty. If you withdraw before the CD matures, the bank deducts an early withdrawal penalty from your balance — typically three to six months' worth of interest. On a $10,000 CD earning 5% annually, an early withdrawal penalty might cost you $125 to $250.
CDs make sense if you know you will not need the money for a specific time period and you want to lock in today's rate before it drops. They also make sense as a way to set aside money and avoid the temptation to spend it, since accessing it costs you.
High-yield savings accounts versus traditional bank savings
The biggest difference in how fast your money grows is not the account type — it is the bank. An online bank's high-yield savings account currently pays 4% to 5.25% annually. A traditional bank's savings account pays 0.01% to 0.5%. On $10,000, that is the difference between earning $400 to $525 per year and earning $1 to $50 per year.
Why the gap? Online banks have no physical branches, no tellers, and lower staff costs. They pass those savings to customers in the form of higher interest rates. Traditional banks maintain thousands of branches and pay for in-person service, so they can afford to pay less on deposits.
The trade-off is convenience. An online bank has no branch you can walk into. You manage your account through a website or app, and deposits happen by mail or transfer. If you value the ability to hand cash to a teller or speak to someone in person, a traditional bank may be worth the lower rate. If you just need a place to park money and watch it grow, an online bank is almost always the better choice financially.
How interest compounds and what it means for your balance
Banks pay interest in different ways. Some pay it monthly, some quarterly, some annually. The more often interest is paid, the faster your balance grows, because you earn interest on the interest itself — this is called compounding.
Here is a concrete example: $10,000 in a savings account earning 5% annually. If the bank compounds monthly, you earn about $51.16 per month on average, and your balance grows to $10,512.68 after one year. If the bank compounds annually, you earn exactly $500 once a year, and your balance is $10,500. The difference is small with one year, but over five years, monthly compounding adds up to about $150 more.
When comparing accounts, look for the APY (annual percentage yield), not the APR. APY already includes the effect of compounding, so it tells you the true amount you will earn in a year.
When to use each account type
| Account Type | Best For | Current Rate Range | Access to Money |
|---|---|---|---|
| Checking account | Daily spending and bills | 0% to 0.5% | Anytime, no penalty |
| Savings account | Emergency fund or short-term goals | 4% to 5.25% | Anytime, no penalty |
| Money market account | Large balance you want to access occasionally | 4% to 5.5% | Anytime, but may have limits |
| Certificate of deposit | Money you will not need for months or years | 4% to 5.5% | Only at maturity; early withdrawal costs |
Frequently Asked Questions
Can I move money between accounts without losing interest?
Yes. Transferring money from one account to another does not affect interest. You only lose interest if you withdraw from a CD before it matures. Moving money between a savings account and a checking account, or between two different banks, has no penalty.
What happens to my interest if the bank lowers its rate?
For savings and money market accounts, the new rate applies to your balance going forward. If your bank lowers the rate from 5% to 4%, you earn 4% on whatever balance you have from that point on. For CDs, your rate is locked in and does not change, even if the bank lowers rates for new customers.
Is my money safe if I keep it in a savings account?
Yes. Deposits at banks insured by the FDIC are protected up to $250,000 per account type per bank. A savings account, checking account, and money market account are each covered separately, so you can have $250,000 in each and all are protected. CDs are also covered up to $250,000.
Do I have to pay taxes on the interest I earn?
Yes. Interest is taxable income. Your bank will send you a 1099-INT form at the end of the year if you earned $10 or more in interest, and you report it on your tax return. The amount you owe in taxes depends on your tax bracket.
Should I put all my money in a CD to earn the highest rate?
Only if you will not need the money before the CD matures. If you might need it for an emergency, keep at least three to six months of expenses in a savings account where you can access it without penalty. Use CDs for money you are certain you will not touch.