What are the best ways to earn interest on money?
Discover the best ways to earn interest on money and find out how to maximize your savings potential.
Summary
Over half of Americans don’t have $1,000 saved.
High-interest savings accounts can pay 10 to 12 times the standard savings account's national average.
The best way to save depends on your short or long-term goals.
Traditional savings accounts are the best low-risk option for the average American.
What is the best way to save money and earn interest?
In the US, 56% of people say they couldn’t cover an unexpected bill of $1,000 with their savings.
If you’d prefer to be firmly situated in the 44 percent, saving money as soon as possible is crucial, and so is maximizing the interest you earn on the money you save.
Figuring out the best way to save money and the best way to earn interest on savings in your unique situation can help you grow your funds exponentially, especially if you have several years to play with as you attempt to accrue additional money.
Certain accounts can make the most of interest rates, and there are various options for both short-term and long-term savings goals.
What about compound interest?
Before we dive into any recommendations of the best ways to earn interest on money, let’s briefly get to grips with compound interest.
This is a significant influencing factor in terms of your savings. When you can benefit from it, you can grow your money and increase your savings much more than you would otherwise (but you won’t always be able to benefit from it, as this sort of interest strategy won’t work for everyone).
Compound interest is calculated by multiplying interest on the initial amount by interest already accrued.
For example, an amount of $10,000 in an account with an interest rate of 5% would amount to $10,500 at the end of the first year. That’s calculated by multiplying $10,000 by 1.05.
By the end of the second year, the account would have earned further interest on top of the 5%. The longer an account that gathers this kind of interest is open, the longer the periods of compounded interest will be.
Because of this, a compound interest strategy is one of the best ways to earn interest on money if you have longer-term savings goals. Frequent withdrawals will make it impossible for compounded interest to build up.
To see how compound interest works a little more clearly, you may want to check out our compound interest calculator, which allows you to put in your figures and expected return to see how much your investments could be worth in the future.
How do high-interest saving accounts work?
One of the best ways to earn interest on savings, a high-interest savings account can pay as much as 10 to 12 times the standard savings account national average. A quick example helps illustrate the interest-earning potential of these accounts:
Let’s say that you save $5,000 in a standard savings account. Your money will earn $19.50 over a year at the national average rate of 0.39% annual percentage yield (APY). If you save that same $5,000 in a high-interest savings account that earns 4.5%, your money will earn $225 over a year. With this in mind, let’s explore the accounts that offer you the best way to earn interest.
What’s the best way to earn interest on money you save?
Savings accounts serve many functions. They might be used to build up holiday savings, a college fund, or a deposit on a future home — the options are endless.
Primarily, many American families use a savings account to create a cushion. A safety net to catch them during moments of financial difficulty or unexpected expenditure.
In the US, 56 per cent of people say they couldn’t cover an unexpected bill of $1,000 with their savings.
If you’d prefer to be firmly situated in the 44 per cent, saving money as soon as possible is crucial, and so is maximizing the interest you earn on the money you save.
Figuring out the best way to save money and earn interest in your unique situation can help you grow your funds exponentially, especially if you have several years to play with as you attempt to accrue additional money.
Certain accounts can make the most of interest rates, and there are various options for both short-term and long-term savings goals.
What are the best accounts for earning interest?
These days, most Americans have some type of checking or savings account. As of 2021, only 4.5% of US households were without a bank account.
But as for determining the best way to earn interest on money for you? That will depend on your aims and your finances. Different accounts have different advantages and disadvantages that you’ll need to be aware of.
Your options include:
High-yield savings accounts – Generally, high-yield savings accounts offer much higher interest rates than standard accounts. They have daily compounding interest, so the growth potential is enormous. They also have low monthly fees. On the flip side, they’re not always a great option for longer-term savings goals, like retirement.
Interest-bearing checking accounts – The annual percentage yield (or APY) in an interest-bearing checking account earns interest. This account type is famously flexible, with no limits on how often money can be withdrawn. However, this does mean that interest rates are usually very low for this account type, typically around 0.01%.
Money market accounts – These accounts are available through most banks, credit unions, and online lenders. They’re an excellent option for those who wish to save cash but still be able to access it whenever necessary. The interest rate is competitive, meaning there’s plenty of room for growth, but substantial initial deposits are usually required.
Certificates of Deposit (CDs) – CDs also enjoy a higher interest rate than standard savings accounts, have good compound interest rates, and come with low monthly fees. Although they guarantee returns, those returns will likely be lower than if the money had been invested directly into the market.
What are the best options for short-term savers?
The best way to earn interest on savings for short-term savers will depend entirely on why you’re saving. For example, opening a standard savings account is usually best for people aiming to accumulate smaller lump sums.
The money will gain interest without much risk, and the interest earned will depend on the bank’s rate. The current federal rate is between 4.25% and 4.5%.
Traditional savings accounts are also likely the best way to earn interest for the average American with mixed savings goals — some short-term and some long-term. They are safe and stable but won’t necessarily grow your savings far beyond what you put in.
What are the best options for long-term savers?
Specialty savings accounts are one of the best ways to earn interest on your savings if you have long-term goals.
They’re both particularly well-equipped to handle defined savings goals, such as a retirement fund or your child/children’s college fund. CD accounts (mentioned above) are another option, as they’re designed to house money that won’t be accessed immediately.
Cash management accounts are a good choice if you’d like to invest more considerable lump sums for brokerage or retirement. These accounts usually offer higher interest rates than those available at regular banks.
Visit Unbiased to learn more about savings and the best ways to earn interest on money so you can make informed decisions and take better control of your financial future.
Let us match you with an SEC-regulated financial advisor who can guide you with expert financial advice and help you navigate your options.
Iain is the Chief Product Officer at Unbiased.com.
Iain is the CPO at Unbiased.com. He has over 20 years of experience as a product leader building high-performing, cross-functional product teams that generate both customer and business value.