When you have money tucked away in a savings account, you usually earn some interest on the account balance. Unfortunately, the interest you earn might not generate much income. That’s especially true during a recession, like now, when the U.S. central bank lowers rates to encourage more spending and reduce the cost of borrowing money.
In some cases, you’ll wind up earning less than the rate of inflation, which means the money you’ve saved is actually losing spending power over time.
But there are ways to earn more on your money. So, if you have some money set aside and want to earn a higher rate of interest without taking too much risk, consider these strategies.
1. Take advance of bank bonuses
Many banks offer introductory bonuses for new customers that sign up for an account and meet a few requirements. Usually, checking account bonuses require that you set up regular direct deposits and make a minimum number of transactions each statement period.
For people with some savings already set aside, savings account bonuses can be an easy way to increase your earnings. These bonuses typically ask new customers to transfer a minimum amount to the account and keep it there for a period of time. In short, you could boost your savings balance by opening a new account and funding it with savings held at another bank.
For example, you might see a bonus offering $400 if you transfer $10,000 and maintain that balance in the account for at least three months. You can calculate what the effective interest rate for the offer is pretty quickly.
If you earn $400 on a balance of $10,000 in three months, you would earn the equivalent of a 16 percent annual return in that initial three-month bonus period.
As a bonus, you’ll also get the account’s typical annual interest payments while you have your savings in the account, boosting your earnings further.
If you go this route, be careful to read all the fine print. Some banks will charge a fee if you don’t meet certain requirements or try to close the account too quickly after opening it. Some banks might even make you forfeit the reward if you close the account soon after getting the bonus.
2. Consider certificates of deposits
Certificates of deposit (CDs) offer higher interest rates than traditional savings accounts in exchange for reduced withdrawal flexibility.
When you put money in a CD, you have to agree to leave the money in the account for a set period of time, called the term. For example, if you open a one-year CD, you have to leave the money in the account for a full year. If you withdraw your deposit before the term expires, you’ll have to pay an early withdrawal penalty.
One benefit of CDs is that you lock in the interest rate when you open the CD. Even if market rates drop, you’ll keep earning the same rate. On the other hand, if rates rise, you’ll be stuck earning the lower rate until the CD matures.
Once the CD term ends, you can withdraw your money or roll it into a new CD. If you roll the balance into a new CD, you have to wait for that CD to mature before having another chance to make a penalty-free withdrawal.
3. Build a CD ladder
CD ladders combine the higher rates of CDs with some of the flexibility of savings accounts.
To build a CD ladder, you need to open multiple CDs, with each maturing on a fixed schedule. For example, you could spend a year opening twelve, equally sized, one-year CDs. If you open a one-year CD each month for a year, one will mature each month the following year.
That means you can access a portion of your savings each time one of your CDs matures. In this example, instead of locking up all of your money in a single one-year CD, you can get access to portions of it at regular monthly intervals to avoid having to pay a penalty for early withdrawals in the event you need your money.
How you structure your CD ladder depends on how much flexibility you’re willing to sacrifice for higher interest rates and how frequently you want to have access to your funds. For example, a five-year CD ladder would include the purchase of five different CDs with different terms: a one-year CD, a two-year CD, a three-year CD, a four-year CD and a five-year CD. When each CD matures, you’d reinvest into another higher-yielding five-year CD, but you’d still have one of your five CDs maturing every year.
4. Switch to high-interest savings account
Some banks offer special, high-interest savings accounts that can offer much higher rates than traditional accounts.
One of the best places to look for high-interest savings accounts is online banks. Online banks, which benefit from lower costs due to not having to operate brick-and-mortar branches, rarely charge monthly fees—and offer rates that are often ten times higher or more compared to traditional banks.
Another benefit of working with online banks is that it keeps your savings out of sight and out of mind, which can make it easier to resist the temptation to spend your savings.
5. Consider a rewards checking account
Some banks have started offering rewards checking accounts, which can offer higher interest rates, with a catch. Usually, the balance that earns the elevated rate is limited, and you have to jump through some hoops to earn the bonus rate.
For example, Consumers Credit Union offers interest rates as high as 4.09 percent on balances up to $10,000. However, to earn that rate you need to meet all the following requirements:
- Sign up for electronic statements
- Make at least 12 debit card purchases per month
- Receive direct deposits, mobile check deposits, or ACH credits of at least $500 each month
- Spend at least $1,000 per month on the CCU credit card
If you choose to use a rewards checking account, make sure that the requirements to earn the elevated interest rate are easy for you to meet. Otherwise, you’ll earn less interest than a standard savings account.
6. Check with your local credit union
Credit unions, unlike banks, are owned by the people, or members, who hold accounts at the credit union. This means that they work for the benefit of accountholders instead of shareholders.
In some cases, that can translate into lower fees, better account perks and higher interest rates. If you have a credit union near you, check the rates it offers, as you might be able to get a good deal.
7. Consider buying bonds
If you don’t mind a little risk or restriction on your withdrawals, you can put your money into bonds instead of a traditional savings account.
Buying a bond is like making a loan to the company or government that issues it. When the bond matures, you get your principal back plus any interest you earn. You can buy U.S. Savings or Treasury bonds, or bonds issued by major companies. Each has different interest rates and repayment terms, with riskier bonds tending to offer higher rates. Typically, yields are higher on bonds with longer terms and corporate bonds that have higher default risk.
One thing to keep in mind with bonds is that they can drop in value if market rates increase. (The price of a bond moves inverse to its interest rate.) As a result, if you wind up selling your bond to someone else before it matures, you might have to sell it for less than you paid. Still, bonds are far less risky than stocks, making them a good way to increase the yield your savings earns while taking a little more risk.
8. Try a money market account
Money market accounts offer a mixture of the features found in savings and checking accounts. They pay interest, sometimes at higher rates than savings accounts, while offering check-writing privileges and debit cards that you can use to make withdrawals, with some restrictions.
The drawback of money market accounts is that they often have higher fees and minimum balance requirements than savings accounts. There’s also no guarantee that your bank’s money market account pays a better rate than its savings account.
What is right for you?
Each of these options has the potential to increase the interest your savings earns. But which interest-bearing option is right will depend on your needs, risk tolerance and the effort you’re willing to put in.
Bank bonuses, for example, can be very lucrative but require a lot of effort and attention to detail. CDs may pay higher rates, but force you to lock up your money and charge early-withdrawal fees. And higher-yielding bonds put you at risk of losing money if you sell them before they mature and they are worth less than you bought them for due to market volatility.
Take some time to think about which of these strategies is right for you.
Earning interest is one of the many benefits of having a savings account and earning more can only help you preserve or increase the spending power of your nest egg. These strategies are low-risk, but can help you boost your interest earnings.
Featured image by Burlingham of Adobe Stock.