I was talking with a few friends at work the other week, and I found a common problem. They’re all smart, hardworking, business professionals who have money languishing in a big bank savings account. As hard as they work for their money, their money should be working harder for them.
So today, I decided to write about four easy options to safely earn at least 2% on your savings – potentially more.
Disclaimer – none of these are affiliate links, so I don’t get any money if you open an account with these guys. Sad for me. But good news for you.
Interest Rates And You
Look, we all know what happened when the Great Recession hit. You used to make 3%, 5%, or more on your savings accounts. And if you’re a few decades older than I am, you might remember earning over 10% in the ’80s.
Then when the Great Recession came along, rates fell to near-zero. They’ve stayed there ever since. And if you’re with a big bank, you would think they’re still there.
A secret – no, they’re not.
Big bank savings accounts are still paying sub-zero
I know there are reasons people end up in this place. Maybe it’s convenience because there’s a bank branch down the street. Maybe you’re just busy, and the last time you looked
I’m here to tell you that if you’re not earning at least two percent on your savings accounts, you need to make switching a priority.
Your Money Should Make You Money
The recent (past 10 years) money environment has not been kind to savers. Interest rates have hovered near zero, making it nearly pointless to keep money in a savings account. Mathematically, you were much better off using
Even account types that usually paid higher interest rates-such as savings bonds, CD’s, and money market funds-were pretty much at zero.
Even though this has been the situation for a while, I’ve always had faith that one day, rates would go back up. So I never stopped looking for a better deal.
Before I talk about the different options available, I thought I should take a moment to talk about what part of your financial plan should involve savings (as opposed to investing).
Part of your overall financial strategy usually involves a need to keep some portion of money totally safe. And
What kinds of money might need to be held risk-free? Perhaps it’s your emergency fund, which you need to be able to tap at a moments notice. It could be money for a car or home down payment. It could be money for a wedding, a vacation, a rental property, or to start a business. Funds for a large upcoming home remodel or repair (new roof, anyone?). Or perhaps you have a child heading to college in just a few months, and you need money kept safe to make that tuition payment.
I would highly recommend not putting money in savings that you need over five years from now. If college is decades away, you’re saving for retirement, or you have a big vacation you want to take in a decade, you likely don’t want to lose out to inflation.
Longer term money is better off exposed to some level of risk, so you can get a higher rate of return. Look into stocks, bonds, real estate, and other types of investments here.
But let’s say you have money that you need to keep totally safe-for one of the reasons I list above, or another one. Don’t settle for near zero rates. Instead, let’s take a look at four different options you have to earn above 2% on your money.
Savings accounts are insured through FDIC, easy to access, and you can easily get over 2% nowadays.
Personally, I use Capital One 360, but there are better options. Why do I use Capital One? Well, I used to be with ING and Capital One bought them. Until very recently their rates were competitive, and I like how I can have multiple accounts with different automatic transfers. I have separate savings account for car taxes, car repairs, pets, and Christmas. Each week I have a bit of money drafted towards each goal.
I likely will switch sometime before the year is up. I typically don’t want to spend a lot of time and energy chasing rates, so I tend to pick an account where rates are traditionally relatively high and stick with them. I may not get the absolute highest rate, but then I don’t need to spend my time chasing rates.
Where can you get 2% or more? As of this writing:
Money Market Accounts and Funds
Money market accounts, and money market mutual funds, both used to pay quite a bit more than savings accounts. But in the low rate environment of the past decade, they crashed quite badly.
People are often unclear on the difference between the two because the names are confusing. Money market accounts are more similar to a savings account and are FDIC insured. Money market mutual funds, on the other hand, are not. Companies work very hard to make sure money market funds do not “break the buck”, or decrease in value, but we saw during the Great Recession that it indeed can happen.
So when you’re opening an account, be sure you’re clear on which one you’re getting. Money market accounts will pay less interest than money market funds, but you’re exchanging interest for risk. That doesn’t mean money market funds are a bad option, though.
- Capital One has a money market account at 2%, although it has a $10k minimum.
- State Farm has one at 2.25%
Honestly, most of my research here is turning up high – yield savings accounts (see above). So let’s move on to the money market funds. These change frequently so I won’t put the rates here, but they’re all currently above 2%.
Fidelity also offers these funds, but the rates weren’t as good when I checked.
Ah good old certificates of deposit. For a long time they’ve been paying near zero, and it seems people have forgotten about them. But
With a CD, you get a higher rate in exchange for locking your money away for a certain period of time. You get to choose if that’s six months, a year, 18 months, five years, or whatever makes sense.
With rates going up, I personally would not lock it away for a very long time. But if you’re saving for a specific event like a vacation or a wedding, which is a defined period of time away, a CD can be a great option. Normally you actually can get your money out of a CD if you need it, but you may need to pay a penalty or lose some interest. Pay attention to the terms of the CD’s you open.
Some good options for a one-year CD right now include:
Ah, the sorely neglected
More than my mortgage rate!
What is an
They’re not all sunshine and roses, though. There are three key restrictions you need to know.
- You can’t cash it out for a year after you bought it
- If you cash it out before you’ve owned the bond five years, you’ll lose three months interest
- You can only buy up to $10k in ibonds per year. Now, that’s $10k per person, so if you’re married you can each buy $10k
To buy an
And yes, there are other types of Treasury notes you may want to consider – T Bills and TIPS, specifically. You can also find information on them on Treasury Direct. I’m not an expert in this space, but perhaps someone who is can chime in with more info in the comments.
Interest rates change often, so you’ll want to keep up on the best options on sites that focus on this topic. Which is not mine, although maybe it’s a feature I’ll add in the future.
Here are two sites I recommend:
If you’re getting sub zero on your accounts, don’t keep putting off fixing that. Take some time this week, or this weekend, and put your money to work for you. You work too hard for your money to have your army of dollar bills earning pennies when it could be making you much more.
And if you’re aware of any other good safe accounts, or bank bonuses, chime in with a comment.