4 Strategies to Earn More Interest on Savings
4 Strategies to Earn More Interest on Savings
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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A Money Girl listener says, "Hi Laura, my name is Hannah, and I'm from the great state of Maine. I was wondering if you could talk about high-yield savings accounts, what to use them for, and if you have any personal recommendations?"
Jane F. says, "Hello Laura, I'm a new listener to your podcast and truly enjoy your shows. I have $5,000 to invest for short-term gains, like five years, and CDs are the only investments I know of. Can you advise on other investment options I should explore?"
Thank you for those great questions, Hannah and Jane! This post will answer them by exploring how to make the most of your savings. I'll review four strategies to earn more interest with options beyond a basic bank savings account while keeping your money safe.
Hi, friends, and thanks for joining me this week! I'm Laura Adams, an author, media spokesperson, and money speaker hosting the Money Girl podcast since 2008, with over 42 million downloads.
I'm also the founder of The Money Stack, a weekly newsletter and community helping you build your bank account on your terms. It includes each week's podcast, money tips, tools, things I enjoy, and invitations to Live Educational Events and video replays. So, I'd love you to sign up for free at LauraDAdams.com!
If you're not already subscribed to the podcast, that's the best way to ensure you never miss a weekly episode. I always love getting your money questions and comments–you can leave them on our voicemail line at 302-364-0308. You can also send me an email using my contact page at LauraDAdams.com.
When to save or invest
If you're like Jane, with money earmarked for short-term goals like emergencies or purchases you want to make in the next few years, it should be saved instead of invested. Since investing involves risk, it's only suitable for mid and long-term goals, like those you want to achieve in about five or more years.
Keeping your short-term savings safe from investment risk and market volatility is the best way to ensure you can spend them when needed, which is likely why Jane is considering CDs or certificates of deposit.
First, I consider CDs a savings vehicle, not an investment, because they're a deposit account that pays a set interest rate, with virtually zero risk. I'll explain more about CDs and other great savings options, so you know which is best for you.
4 Ways to Earn More Interest on Savings
Savvy savers, like Hannah and Jane, are always looking for ways to earn more interest. Here are four great ways to earn more interest on your savings.
1. High-yield savings account (HYSA)
Hannah asked about high-yield savings accounts, which are a terrific option for short-term savings needs. While a typical bank savings account might pay an annual percentage yield (APY) of 0.2%, a high-yield account might pay over 5% APY!
Don't miss Money Girl episode 799, High-Yield Savings Accounts–Pros, Cons, and Tips for Choosing One, where I cover HYSAs in detail. But I'll give you an overview here.
A HYSA is an excellent choice if you want your money accessible while earning a competitive interest rate. They operate like regular savings accounts but typically pay substantially higher interest because online banks offer them without the high cost of maintaining physical branches. The bank's savings get passed to customers through higher interest rates, allowing your money to earn more.
Opening a HYSA at a bank or credit union insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA) protects your funds up to a legal limit if the institution fails. Both insurances cover up to $250,000 per depositor per ownership category, such as individual and joint ownership.
Most HYSAs allow you to access funds through online platforms, mobile apps, and debit or ATM cards. Your ability to make deposits, withdrawals, and transfers anytime makes it the perfect place for emergency cash and money allocated for short-term goals.
The primary downside of a regular or HYSA is that they offer variable interest rates tied to the federal funds rate, which means APYs can move up or down at any time. Also, some HYSAs offer sign-up bonuses or higher rates for new customers that may decrease after a promotional period.
Some of the highest rates may only apply to tiers of deposits, such as amounts over $5,000 or $10,000, with lower balances qualifying for a lower interest rate. In addition, HYSAs may require you to maintain a balance or make a certain number of monthly deposits to qualify for top rates. So be sure you understand the terms you must meet to keep an enticing APY.
Another disadvantage is that you may not have a physical branch to visit. So, if you prefer face-to-face customer service or need to deposit cash regularly, a HYSA may not be the best choice. You'll have to decide if it's worth the additional interest you can earn on your money.
Hannah, there are many terrific FDIC-insured HYSAs, but Betterment is one of my favorites. They're offering new customers up to 5.5% APY for three months and then 5%.
Another great option is the Platinum Savings from CIT, especially when you plan to deposit higher balances. They're currently paying 5.05% APY on balances over $5,000.
READ ALSO: 9 ways to build emergency funds using a high-yield savings account (HYSA)
2. Money market account (MMA)
A money market account is another way to earn more interest on your savings, typically with FDIC or NCUA insurance. They're like a regular or HYSA because they pay a variable interest rate; however, they usually come with features that make it even easier to access your funds.
For example, an MMA may come with a debit card and paper checks, giving you more ways to tap your cash or send payments. With high-yield savings, you may only have an online platform, ATM card, or online transfers to withdraw money.
However, MMAs and HYSAs can limit the number of monthly withdrawals, such as via ATMs, paper checks, and online transfers, to six per statement cycle. Going over a withdrawal limit means you could get charged a fee for each additional transaction. So, understand your bank or credit union's savings and money market withdrawal rules before opening an account.
While an MMA may charge a monthly service fee, it could pay a higher interest rate than a HYSA, especially if you maintain a high balance. Or it may waive service fees if you keep a minimum balance. So, it's possible to find HYSAs paying more interest than MMAs.
For instance, Discover currently offers an MMA paying 4% APY for balances under $100,000 and 4.05% for balances of $100,000 and higher. Therefore, always shop for accounts paying the highest APY and charging the lowest or no monthly fees based on how much you plan to deposit and maintain in an account.
Be aware that a similar-sounding financial product, called a money market fund, is an investment without any insurance, not a deposit account.
LISTEN ALSO: FDIC and SIPC rules–how much money do they protect?
3. Rewards checking account
When you want to earn more interest on savings, you might not consider a checking account. However, rewards checking can pay competitive variable interest rates if you meet the requirements.
A rewards account operates like a regular checking but imposes rules to qualify for the highest interest rates. For instance, you may have to keep a minimum balance, make monthly direct deposits, or use a debit card for a certain number of monthly transactions. The APY could be similar to a HYSA if you regularly meet the eligibility requirements.
The main upside of rewards checking is instant and unlimited access to your funds while earning competitive interest. That's because there are no potential monthly withdrawal limits with a checking account.
A good rewards checking account is from Axos Bank, which pays a $300 sign-up bonus and up to 3.3% APY. It charges no fees and reimburses all domestic ATM fees.
4. Certificate of deposit (CD)
The accounts we've reviewed so far, HYSAs, MMAs, and reward checking, have variable interest rates that can go up or down. If you want to earn a fixed interest rate on your savings for a period, consider CDs, which many banks, credit unions, and financial companies offer. They come with FDIC or NCUA insurance if purchased from a participating institution.
A CD is a type of time deposit because you put money in an account and withdraw it at a specified time, known as the maturity date. Taking money out of a CD before maturity typically comes with a penalty. It's generally best to buy CDs only when you're sure you won't need the money until after maturity.
In exchange for giving up access to your money during a CD's term, you may receive higher interest than with deposit accounts. As I mentioned, you get a guaranteed return, no matter what happens in the economy.
CD terms typically range from six months to five years, with longer terms yielding higher rates. When a CD term ends, you get back your principal and accumulated interest.
Getting a fixed interest rate may work in your favor if interest rates drop after you buy a CD. But if they rise, you'll get stuck with a lower interest rate for the entire term of the CD. However, you can use a popular strategy called CD laddering to reduce interest rate risk.
RELATED: Bank or credit union–which is better?
What is a CD ladder?
Imagine you bought a $100,000, 5-year CD paying 5%. Now, think about how terrible you'd feel if the interest rate for a 5-year CD went up to 6% the following year. You'd miss out on earning more interest because you locked up your money at 5% for five years and can only withdraw it if you pay a penalty.
With CD laddering, you buy multiple CDs with different maturity dates and interest rates. Each rung on the ladder represents a separate CD with a progressively longer term. That helps you take advantage of rising rates over time, maximizing potential earnings.
With a laddering strategy, you might buy five CDs with your $100,000 instead of just one. For instance, you could put $20,000 in a 1-year CD, $20,000 in a 2-year CD, $20,000 in a 3-year CD, and so on, up to a 5-year CD.
After one year, when the first CD reaches maturity, you can use all or a portion of the money to purchase another 5-year CD. As your shortest CD matures, you can buy a longer-term CD that presumably has a higher interest rate.
Laddering protects you from missing higher returns if rates rise. You earn more money and get greater flexibility. As each CD matures, you can renew it at the current rate or use your money for something completely different.
When you begin shopping for CDs, you'll find many different types. For instance, no-penalty or liquid CDs allow you to withdraw money before maturity without paying a penalty but pays lower interest.
You might find variable CDs that pay an interest rate based on an index such as the Treasury bill or prime rate. And some jumbo CDs require a deposit of at least $100,000 and typically offer higher interest.
The most common reason to buy CDs is when you have a relatively large amount of cash you want to keep safe while earning more than you could with a HYSA or MMA. It's difficult to recommend specific CDs because they vary considerably depending on your chosen term and deposit amount. Do plenty of research by checking institutions online and locally.
RELATED: 7 Ways to Save and Invest for Your Kids and Teens
Where to put your savings
The options I’ve covered aren’t the only places you could put short-term savings, but are the most common and easiest to research, open, and manage.
Opening a HYSA, MMA, rewards checking, or CD doesn't affect your credit scores. You must provide your full name, address, Social Security number, and a government-issued ID. Once your account is open, you can link it to your existing checking or other financial accounts for withdrawals and transfers, including your initial opening deposit.
Before choosing an account, ask yourself the following questions:
If you want to earn as much interest as possible while accessing your funds, a HYSA or MMA is best. But if you don't need access over a given period, a CD might be better if it pays a higher interest rate than the alternatives. You can always open more than one account to meet different savings needs.
That's all for now. I'll talk to you next week. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast. It's audio-engineered by Steve Rickeerg. Our Director of Podcasts is Brannan Goetschius, our digital operations specialist is Holly Hutchings, our advertising operations specialist is Morgan Christianson, our marketing and publicity associate is Davina Tomlin, and our marketing assistant is Kamryn Lacey.