High-Yield Savings Account
A high-yield savings account is a deposit account that offers a higher interest rate than traditional savings accounts you might find at brick-and-mortar banks. Typically offered by credit unions and online banks, a high-yield savings account will pay you several times the national average of savings accounts. If you open one, you can make regular deposits and access your money through withdrawals or transfers to linked bank accounts. You may have to meet a minimum deposit requirement, and your account will be FDIC insured for up to $250,000.
Pros Explained
High interest rates: The most obvious benefit to a high-yield savings account is the high interest rate that will let you earn more in interest over time.Daily compounding interest: While high-yield savings accounts vary, many of them feature interest that is compounded every day instead of every month, making it easier and faster for you to boost your savings.Low fees: Since high-yield savings accounts are usually offered by online banks with minimal overhead, you can expect fairly low fees.
Cons Explained
Withdrawal limits: Some institutions will charge you if you exceed a certain number of withdrawals per month.Fluctuating rates: Interest rates on high-yield savings accounts aren’t set in stone, so it can be difficult to predict how much you’ll earn in the long run.Not good for long-term savings: While a high-yield savings account may be a good place for your emergency fund, you’ll want to put your money in the market for long-term goals such as retirement.
Interest-Bearing Checking Accounts
An interest-bearing checking account is a checking account with an annual percentage yield or APY that earns interest. It works like a traditional checking account and allows you to deposit money via direct deposit, bank transfer, or ATMs. To withdraw money, you can use your debit card, write a check, or transfer funds between accounts.
Pros Explained
Earn interest: Unlike traditional checking accounts, interest-bearing checking accounts reward you with interest.Flexible: You don’t have to worry about transaction limits or how often you make withdrawals.Many options: Since interest-bearing checking accounts are popular, you can shop around until you find the right one for your unique needs.
Cons Explained
Minimum balance and other requirements: To lock in an interest rate, you may be required to meet balance requirements.Potential maintenance fees: Depending on the account, you might be on the hook for monthly maintenance fees.Low interest rates: In most cases, interest rates on interest-bearing checking accounts are very low and typically around 0.01%.
Money Market Accounts
Money market accounts are similar to savings accounts but offer checking account features as well. Available through banks, credit unions, and online lenders, these accounts are usually interest bearing and insured up to $250,000. You may benefit from them if you want to save your cash yet like the idea of being able to access it at any time.
Pros Explained
May earn interest: You can earn a competitive interest rate and grow your money.Checking account features: With a money market account, you may take out cash with debit cards and/or physical checks.Easy access: A money market account can give you immediate access to your funds.
Cons Explained
Large minimum deposit requirements: Most money market accounts require you to deposit a big chunk of money.Withdrawal restrictions: You may be limited to how often you can withdraw funds.Monthly maintenance fees: The financial institution might charge you every month just for having your account.
Certificates of Deposit (CDs)
A certificate of deposit is a savings vehicle with a higher interest rate than a savings account. It comes with a fixed term length and fixed withdrawal date, which is known as the maturity date. If you open a CD, you’ll lock your funds in for a term ranging from three months to five years or more. While you won’t have to pay any monthly fees, there is an early withdrawal penalty for accessing your money before the maturity date. CDs are federally insured for up to $250,000.
Pros Explained
Guaranteed returns: CDs allow you to easily determine how much you’ll earn in interest over time.Higher rates: Compared to traditional savings accounts or money market accounts, CDs usually offer higher interest rates.No monthly fees: You won’t have to pay any monthly fees to keep your money in a CD.
Cons Explained
Early-withdrawal penalties: Since CDs are designed to keep money that you don’t plan on using right away, you’ll have to pay an early withdrawal penalty if you pull funds before the maturity date.Interest-rate risk: While you will reap the benefits when interest rates are high, your CD won’t grow as much when rates are low.Lower returns: Even though CDs are safe, stable investment tools, you will likely earn more if you invest your money in the market.
US Treasury Savings Bonds
Offered by the U.S. Treasury, Treasury savings bonds are considered one of the lowest-risk investments. You can purchase them online from TreasuryDirect or in paper form with your tax refund when you file your annual return.
Pros Explained
Low risk: As long as you keep the bond until maturity, you’ll be guaranteed the entire principal amount plus interest.Face-value pricing for Series I bonds: Series I bonds are sold at “face value” and earn interest on that value.No state or local tax payments: While you will have to pay federal taxes on the interest you earn from a savings bond, it’s exempt from state or local taxes.
Cons Explained
Must wait to receive maximum return: You’ll need to wait up to 30 years to get the most out of the bond, but you can cash them in any time after the first year (for a fee) and get your money back, plus earnings up to that point.Purchase limits: You can’t purchase more than $10,000 in digital savings bonds of each series in any single year nor more than $5,000 in paper I bonds.Low returns: In many cases, you are likely to enjoy higher returns if you invest in the market, although economic conditions can make savings bonds more attractive.
Riskier Options Can Earn Higher Interest
If you have a high risk tolerance, you may be better off with vehicles such as dividend-paying blue-chip stocks and REITs. But the options discussed above are less risky and more predictable. In the event you decide to go with higher-risk products, you’ll need to do more research and figure out what you’ll do if things don’t go your way.
