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Ways to Earn More Interest on Your Savings

ByWallstreet Observer

Quick answer

  • Explore high-yield savings accounts (HYSAs) for better rates than traditional savings.
  • Consider Certificates of Deposit (CDs) for guaranteed returns over a fixed term.
  • Look into money market accounts, which often offer competitive interest rates and check-writing privileges.
  • Invest in short-term bond funds for potentially higher yields, but understand the associated risks.
  • Explore Treasury Bills (T-Bills) for a safe, government-backed way to earn interest.
  • Diversify your savings and investment strategies to balance risk and reward.

What to check first (before you choose a savings strategy)

Current Savings Balances and Rates

Before you can strategize on earning more interest, you need a clear picture of where your money is currently. List all your savings and checking accounts, noting the current balance in each and the interest rate (APY) you’re earning. This baseline will help you quantify the potential gains from any new strategy.

Minimum Payment Requirements

While this section is geared towards earning interest, understanding any existing financial obligations is crucial. If you have debts with high interest rates, paying those down might offer a better “return” than earning interest on savings. Prioritizing high-interest debt repayment is often a more financially sound move than seeking modest interest on your savings.

Fees or Penalties

Be aware of any fees associated with your current accounts or any new accounts you consider. For instance, some high-yield savings accounts might have minimum balance requirements to avoid monthly fees, or early withdrawal penalties on CDs. Always read the fine print to ensure fees don’t erode your potential interest earnings.

Credit Impact

For most savings vehicles, your credit score won’t directly impact the interest you earn. However, if you’re considering options that involve borrowing or investing, your creditworthiness will play a role. For example, a good credit score can help you qualify for better terms on loans or potentially access more sophisticated investment products.

Cash Flow Stability

Your ability to earn more interest often depends on how long you can keep your money deposited. Assess your monthly income and expenses to understand how much you can comfortably set aside without needing to dip into these funds. This will help you determine if a short-term CD or a more liquid savings account is a better fit.

Earning More Interest on Savings (step-by-step)

Here’s a structured approach to boosting your savings’ earnings:

1. Assess Your Current Savings:

  • What to do: List all your savings accounts, their current balances, and their Annual Percentage Yield (APY).
  • What “good” looks like: A clear, organized list that shows exactly how much you have and what it’s earning.
  • Common mistake: Guessing your current rates or forgetting about small, low-yield accounts.
  • How to avoid: Log in to each account online or review recent statements and write down the exact APY.

2. Research High-Yield Savings Accounts (HYSAs):

  • What to do: Compare APYs offered by online banks and credit unions, which often have higher rates than traditional brick-and-mortar banks.
  • What “good” looks like: Finding an HYSA with a significantly higher APY than your current savings, with reasonable minimum balance requirements and no monthly fees.
  • Common mistake: Opening an account without checking for hidden fees or minimum balance requirements.
  • How to avoid: Carefully read the account terms and conditions, paying close attention to fee schedules and minimum balance rules.

3. Consider Certificates of Deposit (CDs):

  • What to do: Explore CDs with varying terms (e.g., 6 months, 1 year, 5 years) and compare their APYs.
  • What “good” looks like: Identifying a CD term that matches your savings goals and offers a competitive, fixed APY for the duration.
  • Common mistake: Locking money into a CD with a low APY or for a term longer than you can afford to leave it untouched.
  • How to avoid: Match the CD term to when you anticipate needing the money. If rates are expected to rise, consider shorter terms.

4. Explore Money Market Accounts (MMAs):

  • What to do: Investigate MMAs, which often offer rates comparable to HYSAs and may come with check-writing privileges or debit cards.
  • What “good” looks like: An MMA that provides a competitive APY and the flexibility to access funds easily if needed.
  • Common mistake: Assuming all MMAs have the same features or rates; some may have higher minimums or lower yields.
  • How to avoid: Compare the APY, minimum balance requirements, and transaction limits across different MMAs.

5. Look into Treasury Bills (T-Bills):

  • What to do: Purchase T-Bills directly from the U.S. Treasury or through a brokerage account. These are short-term government debt securities.
  • What “good” looks like: A safe, government-backed investment with a predictable return for a short period.
  • Common mistake: Not understanding that T-Bills are sold at a discount and mature at face value, meaning your “interest” is the difference.
  • How to avoid: Understand the purchase mechanism and how the yield is calculated. The U.S. Treasury website provides clear explanations.

6. Evaluate Short-Term Bond Funds:

  • What to do: Research reputable mutual funds or ETFs that invest in short-term bonds.
  • What “good” looks like: A fund with a history of stable performance and a yield that meets your risk tolerance.
  • Common mistake: Investing in bond funds without understanding that their value can fluctuate with interest rate changes, unlike CDs or T-Bills.
  • How to avoid: Understand that bond funds are investments, not just savings accounts. Read the fund prospectus and be aware of potential principal value changes.

7. Automate Savings Transfers:

  • What to do: Set up automatic transfers from your checking account to your chosen high-yield savings vehicle each payday.
  • What “good” looks like: Consistent contributions building up your savings balance over time without you having to remember.
  • Common mistake: Setting transfers that are too large, leading to overdrafts or insufficient funds for immediate needs.
  • How to avoid: Start with a smaller, manageable amount and adjust upwards as your comfort level with your cash flow increases.

8. Re-evaluate Periodically:

  • What to do: Schedule a review of your savings accounts and investment yields at least annually, or when market interest rates change significantly.
  • What “good” looks like: Proactively moving your money to capture better rates or adjust your strategy as your financial situation evolves.
  • Common mistake: Setting it and forgetting it, allowing your money to languish in low-yield accounts as rates change.
  • How to avoid: Set a calendar reminder for yourself to review your savings strategy and compare current offers.

Options and trade-offs

  • High-Yield Savings Accounts (HYSAs):
  • Description: These are savings accounts, typically offered by online banks, that provide significantly higher interest rates than traditional savings accounts. They are FDIC-insured.
  • When it fits: Ideal for emergency funds, short-term savings goals, or when you need easy access to your money without penalty. They offer a good balance of yield and liquidity.
  • Certificates of Deposit (CDs):
  • Description: CDs require you to deposit money for a fixed period (term) in exchange for a fixed interest rate, which is often higher than HYSAs. Early withdrawal usually incurs a penalty.
  • When it fits: Suitable for funds you know you won’t need for a specific period and when you want a guaranteed rate of return. Good for medium-term savings goals.
  • Money Market Accounts (MMAs):
  • Description: These accounts typically offer competitive interest rates, are FDIC-insured, and often come with check-writing privileges or a debit card, offering more flexibility than CDs.
  • When it fits: A good middle ground for those who want a higher yield than traditional savings but need more liquidity than a CD. Useful for funds that might be needed on short notice.
  • Treasury Bills (T-Bills):
  • Description: Short-term debt securities issued by the U.S. Treasury. They are considered very safe, as they are backed by the full faith and credit of the U.S. government.
  • When it fits: Excellent for ultra-safe, short-term parking of cash, especially if you want to avoid state and local income taxes on the interest earned.
  • Short-Term Bond Funds (ETFs/Mutual Funds):
  • Description: These funds invest in a portfolio of short-term bonds. They can offer higher yields than savings accounts but come with investment risk, as their value can fluctuate.
  • When it fits: For individuals willing to accept some market risk for potentially higher returns than traditional savings vehicles, for funds they don’t need immediately.
  • Brokered CDs:
  • Description: CDs purchased through a brokerage account. They can sometimes offer slightly higher rates and may be more liquid than bank CDs if there’s a secondary market.
  • When it fits: For investors already using a brokerage who want to diversify their savings options and potentially access a wider range of CD products.
  • I Bonds:
  • Description: Savings bonds issued by the U.S. Treasury that earn a combination of a fixed rate and an inflation rate. They offer tax deferral and protection against inflation.
  • When it fits: Long-term savings goals where you can commit funds for at least one year, and you want protection against rising inflation.

Common mistakes (and what happens if you ignore them)

| Mistake | What it causes | Fix

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