One of the advantages to putting money in savings is the ability to earn interest on your money. Though interest on savings accounts is lower than the potential gains from longer-term investments like stocks, managing a diversified portfolio usually involves keeping some money in shorter-term, more liquid savings. Many types of savings instruments are available, and their interest yields and degrees of liquidity vary widely.
8 Ways to earn more interest on your money
The search for highest interest rates begins by understanding the differences between savings options offered by financial institutions. When comparing rates, the key indicator is the Average Percentage Yield (APY). This represents the total interest earned each year, including both the raw interest rate and the impact of compounding.
1. Traditional bank savings accounts
A traditional interest bearing savings account is a simple, safe place to store money investors don’t plan on using as regularly as a checking account. A bank savings account can be opened with little to no minimum deposit. The bank takes an individual’s deposits and pays compound interest on the balance. Technically, the deposit is a loan. The individual is loaning money to the borrower, the bank. The bank pays out interest for as long as the money stays in the bank account. Side note: if you're curious about how compounding could potentially affect your investment returns over a period of time, check out Titan's Compound Interest Calculator.
One of the best features of savings accounts is liquidity. Investors can access funds anytime, although the Federal Reserve limits the number of “convenience” withdrawals to six per month for pre-authorized, automatic transfers, telephonic transfers and withdrawals, and transfers by check and debit card. However, in-person withdrawals at the bank teller window or by ATM are not subject to the limit.
Another plus: savings are insured by the Federal Deposit Insurance Corp., or FDIC, up to $250,000. If the bank should fail, investors’ money won’t be lost.
The biggest downside is the low interest rates. In August 2022, the average APY for a traditional savings account was 0.13%, according to Bankrate.com. However, banks frequently advertise special offers, such as cash incentives for transferring funds to a new account—for example, a $400 bonus for opening a new savings account with a minimum deposit of $5,000. Some savers will move money from bank to bank to take advantage of the offers, but be careful about conditions such as minimum terms that require tying up the money in the account for a set number of months.
2. High-yield savings accounts
High-yield savings accounts are typically offered by online banks. Because an online bank has lower overhead than a bank with physical branches, it can pass savings to customers in the form of higher APY, which is the interest rate plus compounding. As of August 2022, high-yield APYs were ranging between 1.15% and 2.15%, substantially higher than the fractional interest rates in traditional savings accounts.
High-rate savings accounts are accessible 24/7 and generally charge fewer fees than traditional banks. Most are FDIC insured. Some accounts have no minimum deposit requirements; others require a $1,000 to $5,000 minimum to open an account.
3. Certificates of deposit and CD ladders
A certificate of deposit (CD) is a financial product that receives your lump sum deposit and earns interest for a designated period of time. However, unlike a savings account, the money isn’t liquid. Money won’t be available until the CD “matures” at the end of term. The CD delivers a higher interest rate in exchange for illiquidity. Term lengths vary from a short term (months) to one or more years. Removing funds earlier would incur an early withdrawal penalty. The average 1-year CD rate was 0.58% as of August 10, according to Bankrate.com. The 5-year CD rate was 0.69%.
The upside for CD’s is their ability to lock in a higher interest rate. The rate won’t fluctuate until the term ends. The downside is getting locked into a low rate should interest rates rise.
To mitigate the lock-in risk, you might build a CD ladder. A CD ladder is a strategy that divides the lump sum to be saved into multiple CD’s, with each CD at a different term length. The longer the term, the higher the rate. The CD’s mature on a staggered schedule. You might, for instance, take $10,000 and split it into $2,000 chunks, then invest the chunks in five-, four-, three-, two-, and one-year CDs. At the end of year one, reinvest in a new five-year CD and so on. This maximizes the rate while avoiding locking-up the entire sum in a single long-term CD.
4. Money market funds
A money market fund is a type of mutual fund that specifically invests in cash, cash equivalent securities, and short-term debt instruments like U.S. Treasuries. It is meant to provide savers with high liquidity and low risk. Funds deposited in a money market fund earn interest, in some cases surpassing high-yield savings account yields. Money market fund yield is actually a dividend contingent on fund performance and not calculated as a guaranteed interest rate. The industry benchmark for comparing money market fund yields is the seven-day yield. According to Forbes, the highest seven-day yields in August 2022 were between 1.22% and 1.84%.
One downside of money market funds are the higher fees than traditional bank savings accounts. Another is the higher minimum balance requirements.
A money market fund is different from a money market account (MMA). With money market funds, there is no guarantee of principal, although the risk of losing principal is relatively minimal. Money market accounts are interest-earning savings accounts offered by financial institutions, and they are covered by the FDIC.
5. Rewards checking accounts
Rewards checking accounts combine the everyday convenience of a checking account with interest rates higher than a traditional checking or savings account. However, they can have complex requirements and restrictions, such as minimum direct deposits and debit card transactions, in order to qualify for the higher interest rate. Their advantages are liquidity and convenience (check-writing and debit cards).
6. Credit union savings accounts
Credit unions are financial cooperatives that function like a traditional bank. They are meant to serve their members, not shareholders. If you qualify for membership, you might get higher interest than a bank savings account. They offer interest checking accounts, regular savings accounts, money market accounts, and CDs.
Credit unions traditionally were restricted to employees of a particular employer or people living in a particular region. That’s changing now, with more credit unions opening up to the general public. The credit union is less likely to have as many branches as a traditional bank, however, and because they tend to run with smaller administrative staffs, accessibility and technology support could be more limited.
7. Treasury bills and notes
Regarded as one of the safest investments, backed by the full faith and credit of the U.S. government, treasury bills and notes are U.S. government debt obligations. Buying a treasury bill or note means you are loaning the government your money, and they promise to pay interest until the maturity date, when the face value (principal) will be returned to you.
Treasury bills (T-bills) have a maturity of four weeks to one year. T-bills denominations range from $1,000 to $5 million. Short maturity dates pay less interest than longer maturity dates.
Treasury Notes (T-notes) mature between two and 10 years. T-bills and T-notes are auctioned off regularly on the U.S. Treasury's website; TreasuryDirect. They also are exempt from local and state taxes. For a minimum of $100, savers can purchase treasuries at varying maturity term lengths.
The interest on a T-bill is calculated based on the difference between the purchase price and the face value at maturity. In mid-August 2022, 4 month T-bill interest rates were 2.11%. Ten year T-Notes yields were 2.88%.
A bond is an agreement between a borrower and a lender. The bond issuer pays the bondholder a fixed return over a set period known as time to maturity, at which point the bondholder receives the face value of the original loan. The interest the bond pays between its issue date and date of maturity is called the coupon. Interest is usually paid semiannually or annually.
Cities, states, governments, and companies issue bonds to raise capital for projects or finance debt. Different levels of risk are associated with different bond types. Features to compare include rates, maturity periods, commissions, bond ratings, and penalties for early withdrawals.
Bonds are not as liquid as many other types of savings accounts, but they are generally thought to be safer investments than stocks. Typically, bonds that are bought and held to maturity will be unaffected by bond price fluctuations and moving interest rates and yields. However, some investors trade bonds before maturity on the secondary market, and prices can go higher or lower than the face value of the bond, as interest rates and market conditions change. And if a company goes bankrupt, a holder of corporate bonds might lose out.
How to earn more interest on your money FAQs
Discerning investors frequently ask these questions when comparing features of available savings options:
Which accounts are FDIC insured?
FDIC insurance applies to savings accounts, rewards checking accounts, money market accounts, and certificates of deposit.
FDIC does not apply to bonds, mutual funds, and money market funds. Treasury bills and notes aren’t FDIC insured either, but they can be regarded as safe, because they are backed by the U.S. Government.
How can I buy bonds and treasury bills?
To buy bonds, you need a brokerage account or access to a broker, who will buy the bonds or invest in bond funds.
To buy treasury bills, go to TreasuryDirect, a government run site and register for an account. TreasuryDirect behaves like a brokerage account. T-bills can be purchased at scheduled auctions.
The bottom line
It’s important to consider not only which financial institutions offer the highest rates, but the fine print: terms, conditions, and transaction fees that can impact the bottom line. Comparing different savings instruments for earning more interest can help investors find the right mix of products and services to meet their personal finance needs. FDIC-insured interest bearing accounts and Treasury bills and notes are the safest options. High-yield savings accounts at online banks, credit unions, or certificates of deposits offer a higher rate than traditional bank savings accounts.