Everyone can benefit from saving money. It can help you prepare for emergencies, reach your goals and secure your future. It's especially appealing as the federal funds rate—and therefore interest rates—are higher than they have been in over 20 years.
Money market accounts can serve as a good addition to your financial toolkit, but there are other options that offer higher returns, more flexibility or better terms that align with your unique financial goals. If your goal is to save while earning a healthy annual percentage yield (APY) on your money, consider the options below, including high-yield savings accounts, certificates of deposit and various types of bonds.
1. High-Yield Savings Accounts
These are like traditional savings accounts but with better APYs—sometimes as much as 10 times higher. The tradeoff is that some high-yield savings accounts require a minimum initial deposit or to maintain a minimum balance. If you fail to meet these, you might owe fees or face account closure. However, requirements may be less strict than with money market accounts.
This makes high-yield savings accounts fantastic places to stash an emergency fund that will mostly remain untouched, rather than use it for frequent spending where you'll possibly dip below the required minimum balance.
You can typically make up to six withdrawals a month with a high-yield savings account, and you can make deposits anytime, providing liquidity that some options below lack. Interest rates on high-yield savings accounts are variable and can change, so earnings aren't guaranteed.
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2. Certificates of Deposit (CDs)
CDs work differently from savings accounts where you deposit and withdraw funds as needed. Instead, you're agreeing to deposit a lump sum and leave it alone for a set time. In exchange, you're guaranteed returns at a fixed interest rate, often higher than high-yield savings accounts. They're best if you already have a chunk of money saved that you want to grow without the risks of investing.
CD terms can be as brief as a few months, ideal for boosting short-term savings like holiday shopping, a vacation or a wedding. Others can be as long as five years, best for middle-term savings, like a house renovation you won't start before then.
The longer the term on a CD, the higher rate you can earn. Some banks also offer high-yield CDs, paying a higher APY for larger deposits. CDs weren't appealing years ago when interest rates were paltry, but when the federal funds rate increases significantly, earnings may be worth the restrictions.
If you withdraw money from a traditional CD before maturity, you're charged a penalty fee and lose some interest. No-penalty CDs allow you to withdraw before maturity, but you usually pay the price in a lower APY.
3. Retirement Accounts
If your goal is saving for retirement rather than short-term expenses, consider utilizing retirement accounts such as IRAs or 401(k)s instead of money market accounts. Anyone can open an IRA, while a 401(k) is employer-sponsored. However, both offer special tax benefits.
IRAs and 401(k)s typically come with two main options: traditional and Roth. Traditional IRAs and 401(k)s are funded with pretax earnings, which lowers your taxable income. You pay taxes when you start withdrawing in retirement.
Roth IRAs and Roth 401k(s) are funded with after-tax money, so you don't get immediate tax benefits, but your money grows tax-free and withdrawals in retirement are tax-free. The best choice depends on your age, income potential and tax situation, so it's wise to consult an accountant.
The biggest drawback for these retirement accounts is you pay major penalties for dipping into them before retirement. Only use these as a money market alternative if you won't need the funds until at least your 60s.
4. Treasury Savings Bonds
You may have been gifted savings bonds as a baby that you got to cash in later in life. While no longer as popular, they're still an option for safe long-term savings. When you purchase savings bonds, you're lending the federal government money that's repaid later with interest. While bonds can be redeemed after one year, it's better to wait since they earn interest for up to 30 years, and cashing in early means lost interest.
There are two types of government savings bonds: series EE and series I. Series EE bonds are the ones that were commonly gifted. They come in amounts from $25 to $10,000 and are now electronic-only. They earn a fixed interest rate and are guaranteed to double their value in 20 years. On the plus side, they're safe with guaranteed returns. The downside is they take decades to mature, and the current interest rate is only 2.7%. You also can't purchase more than $10,000 per calendar year.
Series I bonds are intended to protect consumers from inflation. The interest rate works differently from EE bonds: It combines a fixed interest rate with a variable rate based on inflation, and this total rate is reset twice annually. The rate as of November 2023 was 5.27% (1.30% of that is the fixed rate). You can purchase up to $10,000 in electronic bonds per year, though you can purchase another $5,000 in paper I bonds annually using your tax refund. The interest rate is noteworthy, but your money isn't accessible and takes decades to mature, so these are best for set-it-and-forget-it savings.
5. Treasury Securities
Another alternative is purchasing Treasury securities, which include Treasury bills, Treasury notes and Treasury bonds (different from savings bonds). These also aren't savings or deposit accounts, but securities you purchase and get repaid with interest. You can buy them from the government at TreasuryDirect.gov or through a broker or bank. Here are the three main options:
- Treasury bills: These have maturity date options ranging from four weeks to 52 weeks. They're auctioned at a discount, and when yours matures, you're paid face value. Your profit is the difference, as no other interest is paid. Since they're guaranteed by the government, the risk of losing your money is minute, and the brief terms make them ideal for short-term savings. But you may not earn much compared to other savings strategies.
- Treasury bonds: These are sold for terms of 20 or 30 years and pay a fixed interest rate every six months until reaching maturity. As of November 2023, the rate on 20-year Treasury bonds is 4.375% and 4.75% on 30-year bonds. That might sound decent, but since the interest rate is fixed, it may not keep up with inflation.
- Treasury notes: These are more of a middle option between the two, with maturity date options ranging from two to 10 years. The interest rate is fixed, and interest is paid twice a year until maturity. These can be safe ways to save for middle-term goals—though, like CDs, your money is locked away and not liquid if you need it quickly.
The Bottom Line
Don't forget that, when it comes to savings, you're not limited to just one option. It can be helpful to combine different forms of saving to meet both short-term and long-term needs.
For example, you might set aside some money for a long-term goal in a CD or Treasury note for a few years, while using a high-yield savings account for your day-to-day savings or emergency fund. In addition to focusing on savings, make sure you're also keeping tabs on your credit to support your overall financial health. Make sure to periodically check your credit score and credit report for free through Experian.
