Until recently, most people had a difficult time earning much interest on their cash savings, and the returns they saw often fell short of inflation.
But a Federal Reserve campaign to combat rising inflation has resulted in the highest interest rates in more than 20 years, making cash a more attractive option for individuals to build wealth. Smart savers can now find online high-interest savings accounts offering annual percentage yields (APYs) of more than 5.00%, well above the 3.70% year-over-year rate of inflation.
With the Fed forecasting interest rates to stay above 5.00% through 2024, consumers can take advantage of the opportunity to build wealth without the risk of the stock market. You’ll still find plenty of savings accounts with lackluster rates, however. The national average savings rate is just 0.46% as of October 2023, according to the Federal Deposit Insurance Corp.
“Everybody that is not getting at least 4.00% APY is missing out on a very important opportunity,” said Max Lane, CEO of Flourish, an investment platform. “Rates are now working for you as a saver.”
Maximizing the interest you can earn on your cash is one of the best moves you can make for your finances.
What is interest and why is it important?
Banks may borrow the money held in savings accounts and use it to make loans. Some of these funds are returned to account owners as interest.
Compound interest can help your savings account grow. Compounding happens when the money you deposited and the accumulated interest on that money both earn interest.
Let’s say you have $5,000 in an account earning 2.00% APY compounded monthly, meaning interest is added monthly to your account. After the first year, you’ll have $101 in interest and a total balance of $5,101; if you don’t add or withdraw money the second year, you’ll end up with $5,204. In 10 years, the balance increases to $6,106 without adding or withdrawing anything.
This ability to accelerate earnings over time by “earning interest on interest” makes compound interest one of the most powerful ways individuals can build wealth, according to Mark Catanzaro, a senior manager at the Federal Reserve Bank of St. Louis.
1. High-yield savings accounts
The national average rate on savings accounts is 0.46%, but consumers today are finding returns that are often 10 times higher in high-yield savings accounts. These accounts are often offered by online financial institutions that don’t have the overhead costs of brick-and-mortar banks with branch offices.
That’s why the accounts, also called high-interest accounts, tend to pay the highest rates and include perks such as no monthly fees or account minimums. Deposits are protected at federally insured banks and credit unions up to $250,000 per customer, per institution.
Here’s a look at some top high-yield savings account options:
2. Rewards checking accounts
Some banks offer rewards to customers for opening and using rewards checking accounts. Perks vary by bank but can include interest, cash back, ATM fee reimbursement and sign-up bonuses. Cash back may come as points or even airline miles. Other benefits can include cellphone insurance, shopping discounts and identity theft protection, among others, or a combination of these extras.
Axos Bank Rewards Checking
Monthly maintenance fee
$0
Minimum deposit requirement
$50
On Axos Bank’s Website
Rewards checking accounts can have a few downsides, though. Some banks might set certain criteria to earn perks, charge account fees or place limits on rewards. Or you might simply earn better rewards with other options, such as rewards credit cards.
Here’s a look at some top rewards checking options:
3. Certificates of deposit
A certificate of deposit, or CD, is another option for savers looking to earn more interest than a high-yield savings account. CDs can also be federally insured up to $250,000, but they require customers to agree to leave money in the account for a designated time period, or term, without making a withdrawal.
CD terms often range from six months to five years. Choose your term carefully, though, because your money will be tied up, and withdrawing funds early often means paying a penalty fee to the bank.
Here’s a look at some top CD options:
4. CD ladders and how to build one
A CD ladder strategy allows you to earn higher CD rates and have more frequent access to your money. Instead of investing your money in one CD, you spread it across multiple CDs with different maturities.
Your CD ladder will depend on your savings strategy, but ladders typically include a range of short-, medium- and long-term CDs. You can include as many rungs on the ladder as you’d like and split your savings among CDs however you’d like.
Say you want to create a CD ladder and you have $20,000. You could put $4,000 in CD terms of one, two, three, four and five years for a rolling maturity cycle. Alternatively, you could put $5,000 into CD terms of one, two, three and four years.
Regardless of how you structure your ladder, check whether each CD automatically renews at maturity. You’ll also want to think about what to do when each CD matures: Will you use some of the money or reinvest it?
5. Money market accounts
Money market accounts are another option for savers seeking higher interest rates than traditional savings accounts and immediate access to their funds when necessary. These accounts are offered by banks and credit unions and come with insurance coverage of $250,000 per person (as long as the institution is federally insured) but often limit the transactions you can make by check, debit card or electronic transfer. Usually, money market accounts allow for unlimited withdrawals and payments at ATMs or in person at banks, or by mail or telephone, according to the Consumer Financial Protection Bureau (CFPB).
6. Government bonds
Government bonds are like an IOU offered to investors for lending money to a government or municipality, which uses it to fund various projects or daily operations. In return, the bond issuer agrees to pay back the loan on a specific date and to pay periodic interest payments, usually twice a year.
Municipal bonds, or “munis,” are issued by states, cities and counties, while US Treasuriesys are issued on behalf of the federal government. Bonds are designed to deliver a predictable return and generally include some type of tax exemption.
Bonds are typically considered to be low risk, but they do still have risk. The issuer may default on its bonds, the value of bonds may be affected by changing interest rates, and the interest rates may lag inflation, diminishing the value of returns.
Frequently asked questions (FAQs)
Tax considerations can vary depending on a person’s income tax bracket, but interest earned on cash or an investment is almost always taxed as ordinary income. Examples of ordinary income include wages and tips.
Income from munis is generally exempt from federal taxes, but you’ll have to report the income when filing your taxes. Bonds issued by the federal government may also be exempt from state and local taxes.
The number of accounts you can have will depend on your financial institution. Some banks may limit the number of accounts you can open. If that happens, you can always open an account at a different bank or spread accounts across various institutions.
While interest rates on government bonds and CDs are fixed, the APYs on money market and savings accounts are not guaranteed and will fluctuate as the Federal Reserve adjusts its federal funds target rate range. The Fed’s rate range has increased from 0% to 0.25% in March 2022 to 5.25% to 5.5% today, and rates may climb again before the end of 2023. Research and compare options across banks, credit unions and online institutions to find the best rates.
Traditional savings accounts generally don’t have restrictions on accessing funds, but some high-yield savings accounts may limit the number of withdrawals before charging a fee. Money market accounts also usually limit certain types of transactions. CDs and bonds have restrictions on when funds can be accessed, and you could pay stiff early withdrawal penalties.
Additional reporting by Ashley Barnett
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