How to Get High Interest on Savings Accounts

Saving involves setting money aside, usually in a savings account, for future use. When you deposit money in a savings account, the bank lends out your money to individuals and businesses, charging them interest on those loans. A portion of this is passed on to you, the depositor, in the form of interest. So, both you and the bank benefit from this. However, most savings accounts offer miserable interest rates. These low interest rates discourage savings and make it difficult to reach savings goals quickly. Worse still, the money in low interest accounts loses value over time due to inflation. As I mentioned in my blog post on Saving vs Investing, the national average APY for savings account as of March 18, 2024, according to the Federal Deposit Insurance Corporation, is 0.47%. At the same time, the US inflation rate for March 2024 (12-month based) was 3.48%. So, if the interest rate offered by your savings account is less than the inflation rate, you are losing money.

Are there ways to earn a high interest rate on savings account and beat inflation? The answer is a resounding “Yes.” Let’s look at some of the ways.

·         Maintain a high average balance: Many banks offer tiered interest rates on savings account based on the average daily balance. Accounts with a high balance tend to get higher rates than accounts with low balance. So, you may want to increase the balance in your account to qualify for a higher interest rate.

·         Open a money market account: Money Market Account (MMA) is a form of savings account offered by both banks and credit unions. It usually has a higher interest rate than a regular savings account. It commonly offers debit cards and checks, thereby making it easier to access money. However, it may have higher fees or require a higher minimum balance.

·         Open a Certificate of Deposit (CD): CD is a kind of savings account offered by banks. A similar product offered by credit unions is Share Certificate. It offers a fixed interest rate, higher than a regular savings account, for an agreed-upon period. You are required to keep the money in the account until maturity. Otherwise, there may be a substantial penalty. CDs also offer tiered interest rates with different terms and balance offering different rates. I will discuss CDs in detail in the next blog post.

·         Build a CD ladder: CD ladder involves investing in multiple CDs with staggered maturity dates. It gives you access to your funds at regular intervals when each CD matures, and you can decide whether to reinvest or use the funds.

·         Open a High Yield Savings Account: High Yield Savings accounts offer significantly higher interest rates than regular savings accounts.

·         Consider online banks: Online banks typically pay higher interest rates on deposits because they don’t have high overhead costs associated with maintaining physical branches and they often hire few staff, unlike brick-and-mortal banks. As a result, they can pass these savings on to their customers in the form of higher interest rates.

The bottom line

Irrespective of the kind of savings account you deposit your money in, you may want to shop around to get a good interest rate. It is also important to find out the necessary fees that may be associated with the account, the restrictions and penalties that may be incurred. Ultimately, with any of the steps above, you can earn higher interest while taking on low risk, thereby reaching your savings goals faster.