APY, access and inflation: how savings accounts differ

Saving

Savings accounts differ on three things: the yield, how much access you give up, and how easily the bank can change the rate after you have opened it.

APY is the number to compare

APY — annual percentage yield — states a rate with compounding already included, so an account crediting interest monthly can be compared fairly with one crediting annually. The bare interest rate cannot be compared across accounts that compound differently. Compare APY with APY and ignore the rest of the headline.

Access: savings, money market, CD

• High-yield savings and money market accounts. Variable rate, withdraw largely when you like, though the bank may limit certain transfers.
• Certificates of deposit. The rate is fixed for the term, and taking the money out early costs you a stated amount of interest.
• No-penalty and short-term products. They sit between the two, usually at a lower yield than a comparable fixed CD.

Variable means it can move tomorrow

A variable APY can be changed at the bank’s discretion, and the change usually arrives as a line on a statement rather than an announcement. A CD’s rate cannot move for the term, which cuts both ways: you are protected if rates fall and left behind if they rise.

Teaser rates and the twelve-month cliff

Some accounts pay a promotional APY for an introductory period and then drop sharply. Nothing will remind you. Put the end date in your calendar on the day you open the account.

Where inflation fits

Interest tells you how many more dollars you will have. Inflation tells you what those dollars will buy. When the APY sits below inflation, the balance grows while its purchasing power does not. The useful exercise is separating the money you keep because you may need it at short notice from money set aside for something years away — those are different questions, and only the first one is mainly about the rate.

Deposit insurance, and the trap inside it

Deposits at an FDIC-insured bank are protected up to $250,000 per depositor, per insured bank, per ownership category, and credit unions carry equivalent NCUA coverage. Two brands can sit behind a single bank charter, which means they share one limit rather than having one each. Check the charter, not the logo, before spreading a larger balance across names.

This is general information about how these products work, not advice about your own situation. For that, talk to a qualified professional.