In this article:
- 1. Certificates of Deposit
- 2. Money Market Accounts
- 3. High-Yield Checking Accounts
- 4. 401(k)s
- 5. Treasury Bonds, Notes and Bills
- 6. I Bonds
High-yield savings accounts can earn yields on account balances far beyond what traditional deposit accounts provide. These yields, while typically reliable, can still fall short of what's available through other investments.
When considering other options, weigh the factors most important to you, including safety, rate of return and how easily you can access your money. For example, Treasury bonds, bills and notes backed by the U.S. government are typically secure savings options, as are federally insured certificates of deposit (CDs) and money market accounts. Alternatively, 401(k) savings plans are tied to the stock market and may deliver higher long-term returns, especially if your employer offers matching contributions.
The following seven options typically offer a safe place to stash your cash while earning a return on your deposits. You might include one or more of them, as well as high-yield savings accounts, as part of your savings strategy.
1. Certificates of Deposit
Like high-yield savings accounts, CDs usually offer substantially higher annual percentage yields (APYs) than traditional savings accounts. As of October 2023, the average CD rates range from 4.60% to 5.55%, according to the Federal Deposit Insurance Corp. (FDIC). In contrast, the average traditional savings account earns a paltry 0.46%, per the latest Federal Reserve data. Generally, CDs are safe savings options as they are federally insured for up to $250,000 per depositor, institution and account type.
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The main drawback to CDs is that you must agree to lock your money in your account for a specific period, typically from a few months to five years, to obtain the higher yield. If you pull your money out before the fund's maturity date—the date your fund's term ends—you'll likely incur an early withdrawal penalty. In other words, a CD may not be a good option if you anticipate needing your money soon.
However, if you don't need your funds in the near future, CDs can be a great option to help you achieve a short- or medium-term savings goal. For example, if you plan on purchasing a home in a few years, a three-year CD could be an excellent vehicle to park your down payment and earn a higher yield until you're ready to officially begin your home search.
2. Money Market Accounts
Money market accounts (MMAs) can be a good savings option if you're looking for a higher yield than a traditional savings account without being locked into a term. These accounts combine some of the features of a checking account and a savings account, allowing you to write checks while still earning a yield on your deposit. You may receive a debit card to make withdrawals without incurring an early withdrawal penalty, as you would with a CD.
Keep in mind, however, some money market accounts limit the number of monthly transactions you can make to six per month. Before opening this type of account, make sure you understand the minimum opening deposit and minimum balance requirements. Some banks lower your interest rate or charge a penalty fee if your account balance falls below the minimum.
3. High-Yield Checking Accounts
Generally, checking accounts provide lower interest rates than those for savings accounts, but not so with high-yield checking accounts. Also known as interest-bearing checking accounts, these accounts offer the chance to grow your balance at a higher rate—often between 1% and 4%—than a traditional savings account. Some money market accounts with online banks feature yields over 5.00%.
However, you must meet specific requirements to earn the higher interest rate. For example, your bank may require you to make at least one direct deposit each month or agree to receive paperless statements. You usually won't incur a penalty if you fail to meet your bank's requirements, but your APY could revert to a lower rate.
4. 401(k)s
401(k) and individual retirement accounts (IRAs) are essential tools to help you save for retirement. Generally, they provide higher long-term returns through the stock market compared to savings deposit accounts and other options. Additionally, these accounts allow you to take advantage of employer contributions, which is effectively free money toward your retirement.
You can make pretax contributions to a traditional 401(k) or IRA and reduce your taxable income. In either case, your fund grows tax-deferred, meaning you're not taxed until you make a withdrawal from your IRA. By contrast, Roth 401(k)s and IRAs allow you to make after-tax contributions and offer tax-free growth and withdrawals.
Be aware that 401(k)s and IRAs place limits on your annual contributions. For example, the 2024 contribution limit is $23,000 for 401(k)s and $7,000 for IRAs (and more if you're 50 or older). Also, you could incur taxes, penalties and fees if you withdraw your money before a specific age, usually 65 with 401(k)s and 59½ with IRAs.
Some retirement planners assert the average return of a 401(k) ranges from 5% to 8% depending on market conditions. With regular contributions, compounding interest could help you substantially boost the value of your retirement savings over time.
5. Treasury Bonds, Notes and Bills
Treasury bonds and notes provide a safe option to generate a fixed income, backed by the full faith and credit of the U.S. government. The government offers these savings instruments as a way to raise money. You agree to loan the government money with your deposit in exchange for a higher savings yield that pays out interest earnings periodically.
Treasury bonds, or T-bonds, have long terms of up to 20 or 30 years and offer semiannual interest payments. By contrast, Treasury bills, or T-bills, are shorter-term investments ranging from four weeks to one year. Typically, you can purchase T-bills at a discount, and you'll receive your profit upon the bill's maturity date.
For their part, terms for Treasury notes, or T-notes, usually have short- or intermediate-term maturities of two, three, five, seven and 10 years and pay out interest twice a year.
6. I Bonds
While elevated inflation rates pinch your wallet at the pump and grocery store, they can be a boon to your yields with Series I bonds and other savings options. Also known as I bonds, these bonds are linked to the inflation rate. The interest rate typically changes every six months in line with the fluctuations of the rate of inflation. As a result, I-bonds may help you protect your savings when inflation reduces your purchasing power.
I bonds may make sense if you're looking for a savings option with guaranteed returns and short-term liquidity. These bonds currently guarantee a rate of 5.27% through April 2024, making them a great option to diversify your portfolio or savings strategy without worrying about inflation cutting into your gains. You can buy I bonds through TreasuryDirect on the U.S. Department of Treasury website.
Savings and Credit Are Essential to Your Financial Health
As their name suggests, high-yield savings accounts usually offer more attractive yields than you'll find with traditional savings accounts, which can help you achieve your savings goals faster. However, you might consider other tools in the toolbox to ensure security and earn higher yields.
While building your savings is vital for your financial health, maintaining a healthy credit profile is equally important. It's wise to regularly check your credit report and FICO® Score☉ for free with Experian to shed light on your financial standing and discover any credit issues that may require your attention.
