6 ways to earn more interest on your savings

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When you keep your money in a checking or savings account, it will likely lose value over time. Why? Most accounts don’t earn enough interest to keep up with inflation.

When there is high inflation, the value of money decreases over time. This means that the purchasing power of your savings diminishes.

The average savings account interest rate is 0.60% (as of Nov. 2023), but many traditional banks offer as low as 0.01%. U.S. inflation rose 3.7% over the past 12 months, so if your money wasn’t earning over that amount, you effectively lost money.

To protect your savings, it’s a smart idea to seek out interest rates that can outpace inflation. Here are six places to earn more interest on your savings and make your money work harder for you.

1. High-yield savings accounts

High-yield savings accounts generally earn several times the average savings account rate and can outpace inflation. Rates can often be as high as 5%.

These accounts are typically offered by online banks and can help you grow your money faster.

By choosing a high-yield account, you can maximize your returns without taking on extra risk. Plus, many of these accounts come with minimal fees and no minimum balance requirements.

Remember that high-yield account interest rates are variable and may fluctuate over time. Plus, some accounts come with certain restrictions, like monthly withdrawal limits. Still, the higher interest rates can make them a viable option.

2. High-yield checking accounts

With a high-yield checking account, you can enjoy the benefits of both a checking account and a savings account. You can deposit and withdraw funds, write checks, and access your money through debit cards or online banking. At the same time, your deposited funds earn a higher interest rate, helping your savings grow.

These accounts often have minimum balance or transaction requirements to qualify for the higher interest rate.

You’ll typically earn less interest than other options on this list — usually between 1%-3% — in exchange for more liquidity.

Still, high-yield checking accounts are great for those who want to earn interest on their checking account balance. They're beneficial if you plan to keep a higher account balance or use your checking account for daily transactions.

3. Money market accounts

Think of the money market account as a hybrid between a checking and a savings account. It has features of both account types and comes with competitive interest rates.

For example, these accounts may have check-writing options and debit card access, which you won't find with savings accounts. This makes money market accounts a good option for those who want a balance between higher interest rates and easy access to their funds.

Depending on the account, money market accounts can have more restrictions than other deposit accounts. For example, some accounts may have withdrawal limits or require a minimum balance.

Money market accounts are a good option to balance earning higher interest and accessing your money when needed. These accounts offer liquidity without sacrificing too much earning potential, making them great for emergency funds or short-term savings.

4. Certificates of deposit (CDs)

The interest rates on CDs are often fixed for the duration of the term, ranging from a few months to several years. This stability ensures that your interest rate remains constant, regardless of market fluctuations.

The benefit of keeping your money tied up is earning some of the highest interest rates. The best CDs right now offer interest of over 5%.

If you have money you can set aside for a set amount of time, a CD can help you earn more interest while keeping your funds secure.

The biggest downside of CDs is the early withdrawal penalty if you need to access your money before the term ends. These penalties are an incentive to keep your funds invested for the entire term. That’s why it’s best to only keep money in a CD that you won’t need to access right away.

5. Treasury securities

The U.S. government issues treasury securities that you can buy directly through the TreasuryDirect website. It’s also possible to buy them on secondary markets, such as through a bank or brokerage.

There are different types of Treasury securities, including Treasury bills (T-bills), Treasury notes (T-notes), and Treasury bonds (T-bonds). These securities have varying maturities, ranging from a few days to several years.

One advantage of investing in Treasury securities is their low-risk nature. Since Treasury securities are backed by the government, they're considered one of the safest investments.

Treasury securities often offer higher rates than traditional savings accounts or even CDs. The longer the maturity period, the higher the potential interest rate. This makes Treasury securities a good choice if you have a longer-term savings goal and are willing to lock in your money to earn a higher return. Remember that, unlike CDs, interest rates on Treasury securities can fluctuate.

6. I bonds

I bonds are a special type of savings bond issued by the U.S. Treasury. They combine a fixed interest rate and an inflation rate component. The fixed interest rate remains the same, while the inflation rate component adjusts every six months to keep up with changes in the Consumer Price Index (CPI).

This inflation protection feature makes I bonds particularly appealing because it helps your savings keep pace with rising prices. It ensures that your money retains its purchasing power and doesn't lose value due to inflation. These bonds offer very competitive interest rates, over 5%.

Like other Treasury securities, I bonds are a safe and secure investment. They’re not subject to market fluctuations, making them a reliable option if you seek stability for your savings.

There are some limitations with I Bonds. There is an annual purchase limit per individual, and you can't cash an I bond within the first 12 months of buying. If you redeem them within the first five years, you'll lose the interest accrued in the last three months.

How interest rates work

Interest is the cost of borrowing money or the reward for lending money.

When you borrow, you agree to pay back the original amount (the principal) and an additional amount, known as interest.

When you save, you often earn interest on your deposited money. Banks offer interest as an incentive to keep your money with them. The higher the interest rate, the more your savings will grow over time.

It's like a little bonus for letting the bank use your money. So, if you choose a savings account with a higher interest rate, you'll see your savings grow faster.

There are two main ways of calculating interest.

• Simple interest is more straightforward. It’s calculated only on the principal amount. For example, if you have $1,000 with a 5% simple interest rate for one year, you would earn $50 in interest. The interest remains the same throughout the entire period.
• Compound interest considers not only the principal but also the accumulated interest. This means that the interest you earn is added to your principal balance, and future interest is then calculated based on the new total.

Let’s return to the example of the $1,000 earning 5% interest, though this time interest compounds annually. After one year, you would earn $50 in interest, bringing your total to $1,050. In the second year, you would earn 5% interest on the new total, which is $52.50, bringing your total to $1,102.50.

Each year, your interest grows based on the increasing balance, allowing your savings to compound and potentially grow faster over time.

Central banks, like the Federal Reserve, play a key role in determining interest rates. They use monetary policy tools to influence the economy. When the Fed wants to stimulate economic growth, it may lower interest rates to encourage borrowing and spending. If they want to control inflation, they may raise interest rates to discourage excessive borrowing and spending.

Interest rates for savings accounts can vary between institutions and account types. Some banks offer higher rates to attract customers, while others may have lower rates. It's important to shop around and compare different banks to find the best interest rate for your savings.

Understanding APY vs. APR 

When comparing interest rates on savings accounts and other interest-bearing accounts, it's also important to understand the difference between Annual Percentage Yield (APY) and Annual Percentage Rate (APR).

APY takes into account the effect of compound interest, reflecting the total amount of interest you'll earn over a year. It assumes you'll leave the interest earned in the account. For example, if an account has an interest rate of 5% compounded monthly, the APY would be 5.12%.

APR only reflects the simple interest rate over a year, without considering compounding. It's more commonly used for borrowing products like loans and credit cards.

When shopping for savings accounts, pay attention to the APY to see the full earning potential. The higher the APY, the more you can maximize your interest.

How to maximize the interest you earn 

Aside from choosing high-yield accounts, there are a few more strategies you can use to maximize your interest earnings:

1. Keep a higher account balance: Some high-yield accounts offer tiered interest rates, meaning you can earn a higher APY by maintaining a higher balance. Consider consolidating your savings into fewer accounts to take advantage of these higher tiers.
2. Make frequent deposits: The more money you save, the more interest you'll earn. Set up automatic transfers to your savings account each payday to grow your balance consistently.
3. Avoid withdrawals: Some high-yield accounts may have withdrawal limits or fees. Minimize withdrawals to maintain your balance and avoid losing interest earnings.
4. Consider longer-term investments: If you have savings that you won't need for a while, consider putting them into a longer-term option like a CD or Treasury security. These often offer higher interest rates in exchange for less liquidity.
5. Ladder your investments: If you opt for CDs or Treasury securities, consider "laddering" them. This means splitting your money across several CDs or securities with different maturity dates. As each one matures, you can either cash it out if needed or reinvest it into a new CD or security, potentially at a higher rate. This strategy allows you to take advantage of higher rates while still maintaining some liquidity.

The bottom line

The average savings account often doesn’t pay enough interest to keep up with inflation, which is why it’s important to get the most out of your savings.

Turn to an account like a high-yield savings or money market account to find higher-than-average rates.

While each option has its pros and cons, all can help you fight inflation and make your money go a bit further. Consider opening one of these accounts to help ensure your money retains its value well into the future.

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