8 ways to beat low savings account interest rates
For savers, 2024 is still a very good year, as top-savings yields continue to outpace inflation.
But only 17 percent of people aren’t earning interest and another 17 percent are earning interest at under 1 percent, according to Bankrate’s latest online savings survey.
Generally, at the largest brick-and-mortar banks, interest rates have been low for quite a while – despite the Federal Reserve raising rates 11 times in their quest to bring inflation down. Many banks are paying savers minuscule rates on their checking and savings accounts, taking advantage of them not shopping around for a more competitive yield.
Sure, these bank accounts are safe, but with a national average of just 0.58 percent annual percentage yield (APY) on savings accounts, there are other options to boost your earnings without taking on much, if any, risk.
Here are eight ways to get a higher return on your money compared to the savings account rates offered by many traditional banks.
8 ways to beat low savings account rates
- High-yield checking account
- Money market account (MMA)
- Certificate of deposit (CD)
- CD ladder
- Money market fund
- S&P 500 index fund
- Dividend index fund
- Real estate investment trust (REIT)
You can find higher interest rates on a variety of alternatives to the traditional savings account, if you know where to look. Bankrate has assembled some options for you to consider, including the risk and reward that comes with each. (The rates included here are correct as of the date of publication.)
1. High-yield checking account
High-yield checking accounts include FDIC insurance and the benefits of standard checking accounts, with the bonus of higher interest rates.
The risk: Next to nothing, but there are additional restrictions.
Bankrate’s high-yield checking rate table spotlights high-yield programs with APYs ranging from 1.75 percent to 2.02 percent. However, these accounts typically include monthly requirements such as direct deposits and frequent debit card usage to earn higher rates.
The reward: A yield of up to 2.02 percent APY.
Customers who fail to meet monthly checking account minimums may still earn money, but it’s at a lower rate. Still, high-yield checking is a great option and a feature to consider to earn a little money on the funds that are just hanging around your account.
2. Money market account (MMA)
Most high-yield money market accounts are FDIC-insured, but many high-yield money market accounts include balance minimums and additional requirements to receive higher interest rates.
The risk: Before you browse for high-yield money market accounts, consider your spending habits. Most savings accounts, including money market accounts, still have limits on certain withdrawals and transfers per statement cycle, according to Bankrate research published last year.
The reward: Better-than-average earnings.
The interest rates on some online savings accounts can compare with those on money market accounts, and they are currently hovering around 2 percent. But the most competitive money markets include additional bonuses.
Looking at Bankrate’s money market account rates, you can earn yields of 4.25 percent APY or higher.
3. Certificate of deposit (CD)
A CD offers you a fixed return in exchange for locking your money up for a specific time period.
The risk: Banks charge early withdrawal penalties if you decide to take your money out before the CD matures. A typical fee might be three months’ worth of interest, so you want to be sure you won’t need any money you stash in a CD before it matures.
The reward: By agreeing to lock up your money, you’ll be able to guarantee a specific rate of return and usually get a higher rate than you otherwise might with FDIC-guaranteed accounts, especially if you buy a long-term CD.
CDs are usually available in terms ranging from three months to five years, with interest rates as high as 4 to 4.55 percent for five-year CDs. Customers concerned with withdrawal penalties might consider a no-penalty CD, though interest rates are typically lower than on standard CDs.
4. CD ladder
CD laddering spreads your money across a range of certificates of deposit with different terms and fixed interest rates. So a CD ladder averages the interest rate on your CDs and gives you some access to your money, because not all of it is tied up for the same term.
The risk: Locking yourself into low rates.
Building a CD ladder when rates are low can leave some of your money stuck in a long-term, low-rate certificate of deposit. If you own a long-term CD and rates rise, you could be earning a lot more in new CDs.
But by owning a range of CDs in a ladder you also won’t be maximizing your interest, as you would if you owned long-term CDs, which usually pay the highest interest.
The reward: Diversification helps you take advantage of varied interest rates.
In a CD ladder, you invest some of your money at the highest rates available while keeping a portion of your funds in more readily accessible CDs at shorter terms. This method keeps a portion of your funds invested in the market’s highest interest rates at all times.
You can estimate your earnings with Bankrate’s CD ladder calculator to see how much interest you’d earn with a CD ladder.
5. Money market mutual fund
Offered at brokerage firms and some banks, money market mutual funds are uninsured, short-term investments in relatively low-risk securities such as U.S. Treasury bills and bank certificates of deposit.
The risk: Potential loss of principal.
While investors in money market funds aim to maintain a balance that never dips below $1 per share, these funds are not FDIC-insured. The SEC’s new rules for money market funds establish a greater degree of protection for your money, but rapidly falling rates can lead to money market fund losses.
The reward: Monthly dividend payouts with interest rates that are typically higher than savings accounts. Some money market funds are also tax-exempt, which leaves the IRS out of the equation.
Money market funds may offer other benefits such as check-writing privileges and readily available cash via ATM access. When rates rise again, money market funds can provide a competitive alternative to other low-risk account options.
Banks, brokerages and mutual fund companies offer money market mutual funds.
6. S&P 500 index fund
If you’re looking for a cash yield and are willing to stomach more risk, then you might consider a fund based on the Standard & Poor’s 500 Index (S&P 500).
The risk: Potential loss of principal.
Stocks are not guaranteed against loss by the government, and so the value of your principal could go down significantly, even if you are still receiving your regular cash payout. While an index helps diversify your risk by owning many different stocks, it will still decline if stocks as a whole decline. This fund, however, should recover as the economy recovers, so if you can invest for at least three to five years, you can often ride out the volatility associated with stocks.
The reward: Quarterly dividend payments that usually rise over time and capital gains.
The companies comprising the S&P 500 fund are some of the world’s best, and they tend to increase their dividends over time. So the fund’s dividend should also increase over time, too. If you hold onto the fund for years, the cash payout could be expected to rise as well.
In addition to the payout, the fund’s value may also rise over time, so the total value of your principal climbs. During the past 10 years, the S&P 500’s average annualized return was 10.7 percent as of April 3.
7. Dividend index fund
A dividend index fund is even more focused on providing dividend income than the S&P 500 index fund. A dividend fund such as the Vanguard High Dividend Yield Index Fund ETF contains many of the same companies as the latter fund, but it may own them in higher proportions in order to get a higher cash yield. For example, this Vanguard fund yields 3.16 percent.
The risk: Potential loss of principal.
Dividend funds are usually comprised of a diversified collection of strong companies, and they can be somewhat less risky than a standard index fund such as the S&P 500, because dividend stocks are usually less volatile. But they can decline substantially as part of a broader market downturn. To weather these downturns, investors should be able to hold the fund for three to five years at least.
The reward: Rising quarterly dividend payments and capital gains.
The companies in this fund pay out solid dividends, and many of them will continue to grow their payouts over time. So the fund’s current yield could grow substantially over time. If you’re able to hold on to the fund for many years, you will likely have a much higher payout in the future.
In addition to the cash payout, you may also enjoy a rising principal balance as long as the stocks in the fund increase in value. But to enjoy this increase you’ll have to be able to ride out some fluctuations, perhaps even significant ones, in the market price of the funds.
8. Real estate investment trust (REIT)
Real estate investment trusts, or REITs, are a kind of company that owns and manages real estate, and they are well-known for paying out substantial dividends. Many REIT stocks trade on a stock exchange like a publicly traded company.
The risk: Potential loss of principal.
Like any stock, a REIT is not guaranteed against loss by the government, and the investment’s success relies on the competence of the company’s management team as well as the overall performance of the stock market. If the management team makes poor investments or the overall market declines, your principal investment in the REIT could decline.
The reward: High and rising dividends plus capital gains.
REITs can pay out substantial dividends – 3 percent to 5 percent and sometimes more – from owning and managing property. They can grow their holdings and operations, and over time the best-run REITs will steadily increase their cash dividends.
Investors can also enjoy capital gains, as the stock rises from smart management decisions. REITs as a whole have a strong track record, but you’ll need to select a well-managed one, or consider an alternative such as a REIT index fund, which provides you a stake in many different companies and helps to diversify your exposure.
How to think about saving with low interest rates
In our current interest rate environment, you don’t have to accept low interest rates. You might be earning a low APY, or no interest at all, at your bank down the street, but you can earn a more competitive yield at an online-only bank or a credit union.
It’s especially important to have your savings in an account that’s keeping up with, or outpacing, inflation. And in the current environment, the latter is possible. So it’s important to take advantage of this.
Bottom line
You have many avenues to earn a higher yield than what a typical bank account can offer. Your options run the gamut, from no-risk or very low risk options at a bank to higher-return (but higher-risk) options in the stock market. You’ll want to carefully consider how your needs and goals align with the risks and rewards of the investment options you select.
–Bankrate senior writer Matthew Goldberg updated this article.
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