Where to Keep Your Savings to Accrue Interest

woman on a bicycle taking her Savings account piggy bank with her
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When interest rates rise, low-risk savings options suddenly become more attractive. A higher interest rate is an opportunity to grow your money faster, without the higher risk component associated with stocks or mutual funds. 

Setting up an automatic savings program is a relatively easy way to build an emergency fund, save for a down payment on a home, set aside money for a dream vacation, or plan for a future car purchase. But where should you keep your savings if you want to maximize your interest earnings? Luckily, there are many different savings vehicles to choose from, and it's important to know where you can find the best rates

What Is a Savings Account?

A savings account at your local bank or credit union is the most convenient place to save money. If you need to make a deposit or withdrawal, you can pop into a local branch or visit the ATM. The downside is that you may not be putting your money to the best use possible with a traditional savings account. 

At brick-and-mortar banks, you can typically expect to earn an annual percentage yield on savings ranging from 0.01% to 0.30%. To put that in perspective, assume that you put $10,000 into a savings account with a 0.02%. After one year, you'd have earned a whopping $2 in interest. 

Interest rates can vary based on the type of account and the bank, but generally, you can expect rates at traditional banks and credit unions to be relatively low. Banks may offer access to higher rates but only for savers who maintain five- or six-figure balances in savings. 

Regular savings accounts aren't without their merits. They're liquid, meaning you can access your money on very short notice. But that liquidity may not compensate for low-interest earnings. 

High-Yield Savings Accounts

High-yield savings accounts work the same as regular savings accounts with one key difference: they offer a much higher APY for savers. These accounts are most commonly found at online banks, which means you sacrifice the convenience of branch banking. But it's possible to find high-yield savings accounts with an APY as high as 5%. 

Going back to the $10,000 balance in the previous example, your interest earnings for the year would tally $512, assuming a 5% APY. Even at 1.5%, you'd earn over $150 in interest, which is exponentially higher than what you might earn with traditional savings. 

Of course, you do have to weigh the access factor. If you're used to depositing cash into savings, you'd have to use an account at another bank to make those deposits, then transfer the money to online savings. Mobile check deposit can simplify things, but you may wait up to a week for those deposits to clear. And if something goes wrong with your account, you can't speak to a banker or customer service rep in person. 

Money Market Savings and Mutual Funds

Besides a basic savings account, you may encounter another savings vehicle called a money market. There are actually two different kinds of money market accounts: money market savings accounts and money market mutual funds.

Money market savings work almost the same as any other savings account but with two differences. First, these accounts may pay higher interest rates or offer a tiered rate structure based on your balance, something regular savings accounts typically don't do. Second, these accounts may also come with check-writing privileges or a debit card. Like any other savings deposit account, money market savings are limited by Regulation D rules. Essentially, these rules limit you to six withdrawal transactions per month. 

Money market mutual funds are something entirely different. They're not issued by a bank; instead, they're offered by investment companies. You can save in a money market mutual fund through a brokerage account or establish a new account with the fund company directly to take part in a money market mutual fund. These funds invest in various short-term investments collectively in order to produce an attractive interest rate.

Unlike a money market account at your bank, money market mutual funds are not FDIC insured. The money in the fund is invested in the market, meaning there's a higher risk factor involved compared to money market savings or high-yield savings. With money market funds, you also have to consider the fees, particularly the expense ratio. This is a management fee that's assessed as a percentage of your fund assets. While a money market fund, such as Vanguard's Prime Money Market Fund (VMMXX), may yield an annual return of over 1%, you don't get to keep all those earnings once fees are factored in. Remember also that interest on money market accounts and funds is taxable, which can further reduce net earnings. 

Certificates of Deposit

A certificate of deposit, otherwise known as a CD, is another place to save money that is routinely offered by your bank. A CD is a time deposit, which means that the money you place on deposit must remain there for a specified amount of time before you can withdraw it.

You can purchase a CD with a variety of time frames as short as one month or as long as 10 years. Generally, the longer you agree to leave your money on deposit, the more interest the bank will pay you. Banks may also offer higher rates for keeping a larger balance in a CD. Some banks also offer step-up rate CDs, increasing your rate periodically over the CD term. 

In terms of rates, the national average for a 12-month CD was 1.85% as of February 2018. A five-year jumbo CD yielded 2.55% by comparison. At first glance, these rates appear much higher than high-yield savings accounts, but you have to consider how much you need to deposit at a minimum into a CD to earn them. 

Since you're required to leave your money in the CD for the amount of time selected, this can make your money less accessible than a savings or money market account. This can be a good thing since it encourages you to leave the money alone, but in an emergency where the money is needed very quickly, this can be a hindrance. Fortunately, you can access your money before the CD matures, but the bank will impose a penalty that could effectively wipe out the interest you have earned.

Savings Bonds and Treasuries

Another possible option for your savings is in savings bonds. Savings bonds are issued by the U.S. government and are backed by its full faith and credit. Similar to CDs, savings bonds have a maturity date set in which the bond reaches the maximum value. In most cases, this is 20 or 30 years.

Savings bonds are credited interest each month, and you can cash in a savings bond at any time, although doing so prior to maturity may result in forgoing some interest—again, similar to a CD. You can purchase savings bonds at most banks or online at Treasury Direct.

U.S. Treasuries, including T-bills and notes, are another safe savings option that can yield higher rates. Treasures can be purchased for shorter or longer maturity terms, and you can start saving with as little as $100. Interest rates for these savings vehicles are fixed, and yields increase as the maturity term increases. As of February 2018, for example, the 10-year Treasury yield was 2.79 percent. 

What Is Right for You?

When it comes to savings, there isn’t a right or wrong answer. It ultimately depends on your needs. If you're using your savings for overdraft protection and want to have it available instantly in the event you need it, a traditional or high-yield savings account might be the most appropriate. If you're saving for a large purchase or something predictable a few months or years down the road, you can probably find better rates with a CD or possibly a money market fund.

For many people, it comes down to having a mix of multiple savings vehicles. There will be part of an emergency fund in a savings account at the bank, possibly some cash in a money market fund in an investment account, and some CDs, bonds, or Treasuries stashed away for longer-term savings. Whatever the case may be, you want to make sure your money is working as hard as it can for maximum growth.