By: Josh Slocum, McClellan Wealth Management
When it comes to building an emergency fund or interest on savings for a large expense, it’s wise to select a near-zero-risk banking product. But traditional financial savings accounts aren’t your only option. In fact, there are three banking products that actually allow you to earn interest as your cash reserves grow.
Three Ways To Save Money And Earn Interest
- A high-yield online savings account
- An interest-bearing checking account
- A CD ladder
#1 – A High-Yield Online Savings Account
With higher interest rates, high-yield savings accounts use compound interest to make your money grow faster. Naturally, the higher the annual percentage yield (APY), the faster your money grows, giving you a better return than you would with a traditional savings account.
The national average APY on savings accounts is just 0.10%, according to the Federal Deposit Insurance Corporation (FDIC). That’s over 20 times less than some of the highest-yield savings accounts offer.
Why The Difference In APY?
Online banks don’t maintain physical locations and related expenses, so they can afford to pass on those savings to customers and pay higher rates.
Case In Point
Here’s an Excellent Example from Nerdwallet:
Make $150 in interest in one year. Keep $10,000 in an account that earns a 1.50% annual percentage yield (APY is the interest rate after compounding), and you can earn a little over $150 in one year. Compare that with the less than $10 you would get from a regular savings account earning the national average rate of 0.13% APY.
#2 An Interest-Bearing Checking Account
As unbelievable as it sounds, interest-bearing checking accounts do exist. In fact, there are several excellent options for banking customers who want to earn interest on their checking account balances. And most offer all the services and conveniences of traditional checking accounts.
It’s Not Just About The APY
In order to qualify for most high-yield, interest-bearing checking accounts, you’ll likely have to meet certain requirements, which could include:
- Signing up for a direct deposit
- Making at least 10 transactions a month
- Maintaining minimum account balances
Make sure these requirements fit with your normal checking account activity, or you risk paying a fee or missing out on the interest if you can’t meet them.
#3 A CD Ladder
A CD is an investment product that offers a fixed interest rate for a specified period of time. The invested funds, which are insured (up to $250,000) by the Federal Deposit Insurance Corp. (FDIC), are locked in by the issuing bank until the maturity date. CD maturity dates are typically set for predetermined lengths, such as:
- Three months
- Six months
- One year
- Five years
The higher the term for which funds are committed, the higher the interest is paid. Investors can use a “CD Ladder” strategy to take advantage of the various interest rates offered for different periods.
How It Works
To create a CD ladder, divide up the money you’re saving (typically the same amount in each vehicle) and put it into several certificates of deposit with different term lengths. This is Step 1 – opening separate CDs with different maturity dates. Then Step 2 – you renew and convert each CD at maturity. When each CD matures, you reinvest that money into the next longer-term certificate, while your other funds are in CDs with closer maturity dates. By doing this, you’re taking advantage of CDs with the longest term lengths and higher rates while having regular access to your money.
Explore These Savings Options With McClellan Wealth Management
We offer comprehensive financial services including wealth management, financial planning, investment management, and estate and trust planning. Give us a call today at 205-208-9868 or contact us online.
*This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal, or tax advisor for specific information pertaining to your situation. Investing involves risk including loss of principal. Advisory services are offered through McClellan Wealth Management, a Member of Advisory Services Network, LLC.