Your cash could grow faster in a digital bank

  • The average savings account offers a paltry 0.9 percent annual return.
  • But some online banks are providing rates of return closer to 2 percent.
  • "It starts to become material for people," said Nick Clements, co-founder of financial website MagnifyMoney.

Banks are finally raising their returns on savings accounts – digital banks, that is.

Although the Federal Reserve has been upping interest rates, those hikes largely haven't trickled down to consumers in the form of better savings yields. The average savings account is offering a paltry 0.9 percent annual return, according to Bankrate.com.

But some digital banks, such as Ally and Barclays, are offering closer to 2 percent. "It starts to become material for people," said Nick Clements, co-founder of financial website MagnifyMoney.

It sure does — at that rate, $25,000 would produce a return of $500 in a year. And you don't have to worry about market swings, of course, when your money is in a savings account. "Everyone should start comparing what they can get risk-free to what they're investing in," Clements said, adding that some bonds offer a return of just 3 percent.

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MagnifyMoney has ranked some of the best online savings accounts. They're all protected by the Federal Deposit Insurance Corp., a government agency that provides insurance for up to $250,000. You'll pay income taxes on any earnings, remember.

Savings accounts

Clements is a big fan of Ally's savings accounts. The digital bank offers a 1.90 percent annual return, and you can open a free checking account with the bank at the same time, making access to your savings account easy. The savings accounts come with no fees or minimum deposit.

Synchrony Bank also offers a savings account with a 1.90 percent annual return — and its customers can get an ATM card, although as with many online savings accounts, there is a limit of six withdrawals or transfers in a month.

This restriction is actually helpful to people, said Greg McBride, chief financial analyst at Bankrate. "Too easy access can defeat the purpose of saving," he said.

American Express, Barclays and Marcus – the consumer bank of Goldman Sachs — are now offering a 1.90 percent annual return, too.

If you want to chase a higher rate, you can put your savings in CIT Bank, which holds more than $50 billion in assets. The bank offers a 2.15 interest rate, but you have to deposit at least $100 a month or maintain a daily balance of $25,000 or more.

Certificates of deposit

For savers who won't need their money for an extended period of time, interest rates on CDs can be worth a look.

People generally can withdraw their CD interest at any time throughout the term. There are penalties for redeeming the original deposit, however. "If it helps you to think, 'I can't get that money,' it's worth it," said Patricia Seaman, senior director of marketing and communications at the National Endowment for Financial Education.

Savers should look for CDs with the lowest penalties, said Allan Roth, founder of financial advisory firm Wealth Logic. That way, they can match the benefit of a high-interest savings account without the restrictions of a CD. "If you need the money, you break the CD," he said.

Barclays offers a 2.55 percent return on a one-year CD, and there's no minimum deposit. Don't need the money any time soon? Marcus offers a 3.15 percent rate on a six-year CD, with a minimum deposit of $500.

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