5% APY is competitive, but only if you lock it in before rates drop

A 5% annual percentage yield is better than what most brick-and-mortar banks offer—typically 0.01% to 0.5%—but it is not the highest rate available right now. Online banks and credit unions regularly advertise rates between 4.5% and 5.5%, and a few offer slightly higher. Whether 5% is "good" depends on three things: when you opened the account, what other banks are offering today, and whether the rate is fixed or promotional.

Banks change savings rates weekly or even daily, following the Federal Reserve's benchmark rate. A 5% account opened six months ago may have been excellent then and mediocre now. The only way to know if you are getting a fair deal is to check what new accounts earn at other institutions right now, then decide whether switching is worth the effort of moving your money.

Key Takeaways

  • 5% APY beats traditional bank rates by a wide margin, but online banks and credit unions often match or exceed it.
  • Rates change frequently and are not may provide to stay the same, so a 5% account from last year may earn less today.
  • Promotional rates sometimes drop after a set period, so read the fine print to see if your rate is permanent or temporary.
  • Comparing rates across at least three banks takes 15 minutes and can show you whether switching would earn you more money over a year.

How to find what other banks are offering right now

The fastest way to compare is to visit the websites of three to five online banks and note their current rates. Banks that consistently appear in rate comparisons include Ally Bank, Marcus by Goldman Sachs, American Express Personal Savings, Wealthfront Cash Account, and Vanguard Cash Management. Credit unions sometimes offer competitive rates too—check your employer's credit union or search for one in your area through CO-OP Network or Allpoint.

When you compare, look at the rate offered to new customers opening an account today, not the rate you are currently earning. Write down the rate, the bank name, and whether there are any conditions (like a minimum deposit or a promotional period). If you see rates consistently higher than 5%, your current account may be worth leaving. If most banks are at 4.75% to 5.25%, your 5% account is holding its own.

Promotional rates versus permanent rates

Some banks advertise a high rate for new customers, then drop it after three to six months. Before you move your money, check whether your current 5% rate is promotional or permanent. Log into your account or call the bank and ask: "Is my current rate may provide, or does it expire?" If it is promotional and set to drop, you have a decision to make—stay and accept the lower rate, or move your money to a bank offering a better permanent rate.

A permanent 5% rate is more valuable than a promotional 5.25% that drops to 3% after six months. Read the account terms or ask the bank directly. If the terms are buried in a PDF, search for the word "promotional" or "introductory" to find the expiration date.

What the Federal Reserve rate means for your savings

Banks set savings rates based partly on the Federal Reserve's benchmark interest rate, which has ranged from near zero to over 5% in recent years. When the Fed raises rates, banks typically raise savings rates too—sometimes within days. When the Fed cuts rates, banks lower savings rates, often more slowly. This means a 5% rate today could become 4.5% in six months if the Fed cuts rates, or it could stay at 5% if the Fed holds steady.

You cannot predict what the Fed will do, but you can check the Fed's recent decisions and statements on the Federal Reserve's website. If the Fed has been cutting rates, your bank may cut yours soon. If the Fed has been holding steady, your rate is more likely to stay put. This does not mean you should wait for rates to rise—rates can fall just as easily—but it helps explain why your rate might change without warning.

Whether 5% is worth staying for or leaving

If your current account earns 5% and other banks are offering 4.75% or less, stay put. The difference between 5% and 4.75% on $10,000 is $25 per year—not worth the hassle of moving. If other banks are offering 5.25% or higher, calculate how much extra you would earn in a year, then decide if that amount justifies the time to switch. Moving money between banks typically takes three to five business days, and you will need to provide account numbers and routing information.

One exception: if your 5% rate is promotional and expires soon, start comparing now. When the rate drops, you want to know whether to move your money or accept the lower rate. Set a calendar reminder for one month before the promotional period ends so you have time to research and move your money if you choose to.

The difference between APY and interest rate

APY (annual percentage yield) includes the effect of compounding—the way interest earned gets added to your balance and then earns interest itself. A bank might advertise an interest rate of 4.88% but an APY of 5% because of daily compounding. The APY is the number that matters for comparing accounts, because it shows you the actual return you will earn over a year. Always compare APY to APY, not APY to interest rate.

Most savings accounts compound daily, which means interest is calculated and added to your account every day. Some accounts compound monthly or quarterly, which earns you slightly less. When you compare rates, the APY already accounts for this, so you do not have to do the math yourself.

How much extra money 5% actually earns you

The amount you earn depends on your balance and how long you keep the money in the account. On $1,000, 5% APY earns about $50 per year. On $10,000, it earns about $500 per year. On $50,000, it earns about $2,500 per year. These are rough figures because the actual amount depends on when you deposit the money and whether you add or withdraw funds during the year.

If you are comparing a 5% account to a 4.75% account, the difference on $10,000 is $25 per year. On $50,000, it is $125 per year. Decide whether that difference is worth the time and effort to move your money. For most people, switching for a 0.25% difference makes sense only if they have a large balance or plan to keep the money there for several years.

Frequently Asked Questions

Can a bank lower my 5% rate without warning?

Yes. Banks can change savings rates at any time, even if you have not closed or changed your account. However, they must notify you before the change takes effect, usually by email or mail. If your rate is promotional, the bank can lower it when the promotional period ends. If your rate is permanent, the bank can still lower it, but you can move your money to another bank before the change takes effect.

Is 5% APY may provide to stay the same?

No. Rates change based on market conditions and the Federal Reserve's decisions. A 5% rate today could be 4.5% in six months or 5.5% in a year. The only may provide is that the bank will notify you before changing your rate. If you want predictability, you could move your money to a certificate of deposit (CD), which locks in a rate for a set period, but CDs typically require you to leave the money untouched or pay a penalty to withdraw early.

Should I move my money to a bank offering 5.5% instead of 5%?

It depends on your balance and how long you plan to keep the money there. On $10,000, the difference is $50 per year. If moving your money takes an hour of your time, you have to decide if $50 is worth it. On $100,000, the difference is $500 per year, which might be worth the effort. Check whether the new bank has any fees or minimum balance requirements that could eat into your earnings.

What happens to my 5% rate if the Federal Reserve cuts interest rates?

Your bank will likely lower your rate, though not necessarily by the same amount the Fed cuts. If the Fed cuts by 0.5%, your bank might cut by 0.25% to 0.75%. Banks do not always pass cuts directly to savers. Check your bank's rate history or call and ask how they have responded to past Fed cuts to get an idea of what might happen.

Is a 5% savings account better than a money market account?

Both are savings products that earn interest, and both are insured by the FDIC up to $250,000 per account holder per bank. Money market accounts sometimes offer slightly higher rates, but they may require a larger minimum balance or limit how many withdrawals you can make per month. Compare the rates and terms of both to see which works better for your situation.