How to Earn More Interest on Your Savings In 2023
Interest rates are near historic lows, posing a challenge for anyone who wants their money to grow.
Opportunities for higher returns exist, such as real estate and the stock market. However, those also entail higher risk. Hence, the adage: High risk; high return.
Fortunately, as you become proactive in managing your money, you’ll find there are a number of ways to earn a better return without compromising the safety of your money.
5 Ways To Earn More Interest On Your Money
- Do regular online research
- Be proactive opening new accounts
- Target accounts for specific purposes
- Consider other types of savings and strategies
- Consider other types of institutions
1. Do regular online research
Interest rates at the present time are, again, near the lowest they have ever been, causing consumers to search for better ways to grow their savings.
But that hasn’t always been the case, nor is it certain to continue on in perpetuity. Interest rates change more often than you might suspect. There was a time when savings account interest rates over 7% were common.
Competition could work in your favor.
Banks, credit unions, and other financial institutions make their money by making loans on which they earn interest. Their best sources for the money they lend are the steady deposits in their savings and checking accounts. And, like other businesses, banks have to compete with other financial institutions for that money.
As a general rule, online banks have lower fixed costs compared to traditional brick-and-mortar banks. Therefore, it’s often the case that online savings accounts offer a higher return. Spending five minutes once a month to check out prevailing interest rates could reveal opportunities to earn more interest on your savings account, money market account or CD that you wouldn’t have known otherwise.
2. Be proactive opening new accounts
Inertia is something that afflicts most of us, but it may not be a good thing when it comes to managing your money.
It’s easy to keep a set of banking accounts in place once you’ve determined what you need. But a lot of people stay with those accounts as rates drop. When better offers arrive, inertia prevents them from leaving their under-performing accounts even when they know opportunities exist elsewhere for a higher return.
One of the reasons people don’t stay on top of their online research is they fear the answer to the question: What would I do if I saw a higher return for my savings account advertised somewhere else?
The thought of the hassle involved with opening a new bank account is enough of a barrier, so they don’t look for opportunities to earn more interest on their money.
Not interested in chasing rates? Competitive banks usually maintain the best rates over time.
For banks that consistently offer higher rates, read: America’s Best Rates survey
Some may be reluctant to add more accounts because they suspect it could adversely affect their credit scores. Not so. No credit decision is involved when a bank or credit union opens a new savings account, and there is no penalty for owning multiple savings accounts.
In order to increase the annual return on your money, you need to be proactive and decide ahead of time that, when you see a good offer, you’ll take full advantage of it.
3. Target accounts for specific purposes
Savings accounts can help you achieve financial goals like eliminating debt, saving for a house or staging your investments.
But to earn more interest, you need to leave savings untouched for long periods of time. That’s why it helps to have multiple savings accounts targeted for specific purposes.
For example, if you have an under-performing savings account, keep it – but do the research to find one with a reputation for consistently high rates and open that account for a different purpose. Use your existing savings account as your go-to emergency fund. Then your new, targeted savings-account balance can remain untouched for longer periods and earn more interest.
4. Consider other types of savings and strategies
The traditional savings account is by no means the only way to save money. There are alternative savings vehicles such as certificates of deposit (CDs) and money market accounts.
If you’re saving for a new car which you plan to buy in, say, three years, you might want to pick a savings product (CD, etc.) with a longer term, higher return and less access. But you might miss the liquidity if you’re saving for something you want sooner. In that case, you might think about a different strategy that provides both high return and access to your funds.
How to earn more interest while maintaining liquidity
Certificates of deposit typically offer a higher return than a savings account because the bank can count on the money staying on deposit, enabling them to lend more of it out and earn more interest. That’s because your funds are committed for a specific term in a CD, say six months to five years.
If committing your savings for such a long time gives you pause, CD ladders can increase your annual return while giving you periodic access to your balance as you save. Here are two strategies for how to construct the ladder:
- Construct a monthly CD ladder
To construct a monthly CD ladder, you split the amount you wish to commit in a CD into 12 parts. Invest the first part in January, for example. Invest the second part in February, and so forth. This way, a portion of your CD investment matures every month. If you don’t need it at that time, simply reinvest it in another CD for the next year.
- Construct a CD ladder for a specific date
You can also construct a CD ladder to mature at a specific date in the future. In the example of replacing your car in three years, you would buy CDs every month all with the same maturity date (or as close to it as you can get). This allows you to earn higher interest on the money you put in earlier.
Tax-advantaged savings options
If you are saving for a specific purpose, there may be a tax-free plan from which you can benefit. A prime example is a 529 plan that allows you to save for a child’s education. The interest you earn in this type of savings plan is tax-free.
Likewise, you can save money for your retirement in a Roth IRA savings account. Contributions come from taxed income, but none of the interest accrued is taxed.
Pursuing alternative types of savings accounts like these may not yield a higher APY, but the tax savings result in a higher take-home yield.
5. Consider other types of institutions
There are other options in addition to the various types of savings accounts banks offer. Although they may not be FDIC-insured, they are nevertheless legitimate and safe alternatives. Three stand out:
Brokerage accounts
Most online brokerages require that you open what amounts to a staging account from which you can make investments in mutual funds, the stock market and bonds. Like bank savings accounts, these usually earn a competitive rate of return. Furthermore, such cash balances’ SIPC protection makes them as safe as FDIC-insured bank savings products.
Some banks (like Bank of America) own brokerages and make it easy to move money between the bank’s savings and brokerage investment accounts.
Brokerage accounts offer you the opportunity to invest in either bonds which pay fixed interest or in stocks which pay dividends. To be sure, these investments do not have consumer protections like the FDIC, NCUA or even the SIPC; but their higher risk may yield a higher return. Losing money is a possibility, however, which you may decide is unacceptable. Still, it is wise to be aware of these options in order to make an informed decision.
Credit unions
Credit union savings accounts are practically indistinguishable from those a bank offers. Like the FDIC, the NCUA offers federal insurance (up to $250,000), making a credit union as safe as a bank. Compare their interest rates online. You may find that their rates are as good as, if not higher, than those offered by banks.
Fintech options
PayPal started it several years ago when they were part of eBay. Customers parked their eBay money there and PayPal offered competitive interest rates on those deposits. There wasn’t any protection, though, other than PayPal’s good name.
Other companies have since entered this space, some in cooperation with existing banks and credit unions and some (like Acorns and Stash) on their own. The bottom line is they often offer higher interest than you can earn at your local bank. Those teaming up with existing banks or credit unions offer the usual FDIC/NCUA insurance, which is a sizable advantage.
Frequently Asked Questions
Q: I will have approximately $50,000 very soon and want to earn as much money as possible within the next two years, and then buy a house. What do you recommend?
A: With a time-frame of just two years, you should forget about any securities that fluctuate in value or otherwise entail investment risk, because those would carry the possibility that your $50,000 would not be fully available when you are ready to buy a house.
That leaves you with the option of guaranteed, interest-bearing instruments. Unfortunately, yields in those vehicles–which can include everything from savings accounts to short-term U.S. Treasury securities–are quite low these days. However, with preservation of principal as your primary goal, these are the kind of financial vehicles you should be considering.
Two-year Treasuries are yielding only about 0.25 percent, and while a bond with a longer maturity will probably have a higher yield, it would also carry the possibility of being depressed in price within your two-year time-frame. You should be able to do better, and without the risk of price fluctuations, by focusing on deposit products.
Among deposit products, two-year CDs generally yield more than savings or money market accounts. You could actually consider CDs longer than two years in length, as long as the penalty for early withdrawal is reasonable. Those penalties are often only a couple months’ worth of interest. Over the course of two years, you’d earn more in the average five-year CD, even after paying two months of interest in penalties, than you would in the average two-year CD. So shop for the best CD rates you can find, and if you can find one with a reasonable early-withdrawal penalty, consider longer-term CDs in your search too.
