Choosing the right account to grow your money is an important financial decision. With interest rates rising, now is a great time to open an account to maximize returns. This article will provide a detailed comparison of high yield savings accounts, money market accounts, certificates of deposit (CDs), and other options to help you determine which account is best suited for your financial goals.
What are the options for growing my money?
Here are some of the most common accounts to consider for growing your savings:
- High yield savings accounts – These bank accounts offer higher interest rates than a typical savings account, usually in exchange for maintaining a minimum balance. Interest rates are variable but tend to follow market rates.
- Money market accounts – Money market accounts function like savings accounts but generally pay even higher interest rates. They may have more restrictions on withdrawals.
- Certificates of deposit (CDs) – CDs are time deposit accounts that pay a fixed interest rate for a set period of time, often 3 months to 5 years. Early withdrawal results in a penalty.
- Treasury securities – These are bonds and bills issued by the U.S. Treasury that pay interest. Short-term T-bills mature in a year or less while longer-term notes and bonds can mature from 2 to 30 years.
When choosing between these options, consider the interest rate, account restrictions, and your timeline for accessing the money. Generally, accounts with the highest interest rates come with more caveats.
How do high yield savings accounts work?
A high yield savings account is a type of savings account offered by banks and credit unions that pays a higher interest rate than a traditional savings account. Here’s how they work:
- Interest rates are usually variable and tied to the federal funds rate. Rates can fluctuate but tend to be higher than a regular savings account.
- Minimum balance requirements are typically anywhere from $500 to $25,000 to earn the higher interest rate.
- Limits may be placed on withdrawals, like up to 6 per month.
- Interest is compounded daily and paid monthly.
- Accounts are FDIC insured up to $250,000 per depositor.
- Offer convenience like online banking, ATM access, mobile deposits.
The national average interest rate for high yield savings accounts is currently 0.17% APY compared to just 0.06% APY for a traditional savings account. Good options will offer at least 2% APY or more.
What are the pros and cons of high yield savings accounts?
Here are some of the key pros and cons to consider with a high yield savings account:
Pros
- Higher interest rates than traditional savings
- FDIC insured
- Low risk
- Easy access to your money
- Convenience of online banking
Cons
- Interest rates can fluctuate
- Minimum balance requirements
- Limits on withdrawals
- Rates may not outpace inflation
Overall, a high yield savings can be a great option if you want to earn passive interest on your money while keeping it safe and accessible.
How do money market accounts compare?
Money market accounts are FDIC-insured deposit accounts that function much like high-yield savings accounts. Here’s how they compare:
| Feature | High Yield Savings Account | Money Market Account |
|---|---|---|
| Interest rate | Average 0.17% APY | Average 0.21% APY |
| Access to funds | Withdraw anytime | Limited to 6 withdrawals per month |
| Minimum balance | $500 – $25,000 | $2,500 – $100,000 |
| FDIC insured | Yes, up to $250,000 | Yes, up to $250,000 |
| Perks | ATM card, online banking | Checks, debit card, online banking |
As you can see, money market accounts offer slightly higher interest rates but come with higher minimum balance requirements and more restrictions on withdrawals. Both are excellent options for growing your money while keeping it safe.
When do CDs make sense?
Certificates of deposit (CDs) can make sense when you know you won’t need access to your money for a set period of time. Here are the pros and cons of CDs:
Pros
- Pay higher interest rates than savings accounts
- Fixed interest rate is guaranteed
- FDIC insured up to $250,000
- No risk
Cons
- Require a minimum deposit, often $1,000 or more
- Charge early withdrawal penalties
- No flexibility – money is locked up
- May not keep pace with inflation
CD terms can range from 3 months to 5 years. The longer the term, the higher the rate. CDs are best for money you don’t need immediate access to, like savings for a house downpayment coming due in 1-2 years.
How do Treasury securities compare?
Treasury securities like Treasury bonds, bills and notes are debt instruments issued by the federal government. They can provide higher returns than savings accounts or CDs but come with some key differences:
| Feature | Treasury Securities | High Yield Savings |
|---|---|---|
| Risk profile | Very low risk | No risk |
| Return potential | Higher returns possible | Lower returns |
| FDIC insured? | No | Yes |
| Liquidity | Depends on maturity date | Withdraw anytime |
| Tax treatment | Income taxed federally | Tax-deferred growth |
In summary, Treasury securities offer higher return potential but come with more risk and less flexibility. Savings accounts mean sacrificing some return for the safety of FDIC insurance and daily liquidity.
Who offers the best high yield savings accounts today?
Some financial institutions known for offering competitive high yield savings account rates include:
- CIT Bank – Up to 2.75% APY
- Axos Bank – Up to 2.50% APY
- UFB Direct – Up to 2.41% APY
- Marcus by Goldman Sachs – Up to 2.15% APY
- Barclays – Up to 2.10% APY
- Ally Bank – Up to 1.90% APY
Rates are subject to change so shop around for the best high yield savings accounts. Focus on the APY rather than just the interest rate. Compare minimum balances, fees, accessibility, convenience, and insurance protection.
What steps can I take to maximize my returns?
Here are some tips to maximize your returns in a high yield savings account:
- Shop around for the highest rates – Compare interest rates across multiple banks and credit unions. National averages can be deceiving.
- Watch out for fees – High fees can take a big bite out of returns. Opt for accounts with low or no fees.
- Automate deposits – Set up regular transfers into your savings account to build balances faster.
- Start big, deposit often – Open accounts with lump sums when possible. Make frequent deposits.
- Ladder maturities for CDs – Open multiple CDs with staggered maturity dates to take advantage of rising interest rates.
- Reinvest interest earned – Opt to have interest paid compound back into your account.
Putting a little extra effort into finding the right account and deposit strategy can really pay off over time. Consistency and compounding are key.
What are the alternatives worth considering?
Besides the accounts discussed already, a few other options worth considering for growing your money include:
No-Penalty CDs
These allow withdrawal of funds without a penalty prior to maturity. Rates tend to be lower than regular CDs. Make sense if you want higher rates but may need access to money.
Rewards Checking
High interest checking accounts that pay up to 6% APY but require debit card transactions and direct deposits. Can be lucrative if requirements are met.
Peer-to-peer Lending
Invest money through P2P sites like LendingClub and Prosper to earn fixed interest rates from personal loans. Higher returns possible but involves more risk.
High Yield Bonds
Individual bonds and bond funds that pay higher interest rates due to higher risk of default. Best suited for more aggressive investors.
Talk to a financial advisor to understand if any of these options may be a good fit for your specific situation and investment goals.
What are the current interest rates?
Here are the current interest rates across different savings and investment account types as of [insert today’s date]:
| Account | Current Rates |
|---|---|
| High yield savings | 0.17% APY average (up to 2.75% APY) |
| Money market account | 0.21% APY average |
| 1-year CD | 1.50% APY average |
| 5-year CD | 2.75% APY average |
| 10-year Treasury note | 4.0% interest |
| S&P 500 index (stocks) | 11% average annual return |
Interest rates across savings vehicles are rising in response to Federal Reserve rate hikes. Stock market returns are falling from pandemic highs. Locking up money in longer-term CDs or bonds is offering higher guaranteed returns.
Conclusion
Choosing the right account for your money will depend on your timeframe, goals, and risk tolerance. For short-term savings goals where you need daily access to money, high yield savings and money market accounts offer an excellent mix of return, liquidity, and security. For longer-term goals, CDs and Treasury securities can provide higher yields. Talk to your bank or financial advisor to understand all your options.