Interest-Earning Accounts

A woman watering her money tree of high-interest accounts

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There are several types of accounts where you can place your money and receive a regular return of interest income. However, each type of account has its own downside including liquidity and the rate of return (ROR)on the sum deposited. Liquidity means the ability to access your funds and turn them into cash. The rate of return is the income the owner receives after depositing funds into an account.

Interest-Earning Savings and CDs

Savings and certificates of deposit (CDs) obviously pay interest income, However, these accounts limit your access to the invested funds. Savings accounts limit the number of certain outgoing transactions each month, so they typically don't allow you to do much besides make withdrawals or transfer to checking. CDs require the funds to be left alone until the note matures—which can be months or years down the road.

Money Market Accounts

Money market accounts pay a high level of interest, often paying as much or more than savings accounts. What's more, you've got access to your money - you can often spend with a debit card or write a check to use that money. The catch is that there are limits on how frequently you can take advantage of those options. Six per month is on the high end, but some accounts set the limit at three per month.

Checking Accounts

Free checking accounts are great because you get great features at no cost. But they often skip one important feature which is the ability to earn interest on your money in the bank. It's nice to have the ability to spend, whether by debit card, online bill payment, or old-fashioned paper checks.

Interest checking accounts are another option. These are fully-functioning checking accounts, meaning there are virtually no limits to how often you can spend from the account. These accounts can be found at traditional banks, credit unions, and they're especially easy to find at credit unions.

Some interest checking accounts, known as reward checking, pay extremely high rates, but they require that you meet certain criteria to earn interest. For example, you might have to use your debit card at least 10 times per month and sign up for online statements. If you don't meet the criteria, you won't earn interest that month.

Other banks—especially online banks—pay interest at competitive rates, and it's easy to qualify for those earnings, even in a checking account. Online banks often charge no monthly maintenance fees, and there are no minimum balance requirements to get started. For an idea on where to find these accounts, look at Ally Bank.

The Link Effect

Linking your checking account to an interest-bearing savings account is an option if you can't get a checking account that pays interest. It can be done within your existing bank (transfers between checking and savings are more or less instant), or you can link to an external account.

Online bank accounts often pay more than brick-and-mortar banks, so you might just need to open an online-only account and link that account to your everyday checking account. Transfers usually take three business days or so, so you’ll need to plan ahead (just a bit) – unless you also set up online bill pay at your online bank.

Although funds might show up in your account shortly after you request a transfer, they might not be available for withdrawal (or spending) right away – make sure you get familiar with the timing, so you don’t miss any important payments.

Dividends Are Basically the Same As Interest Payments

You might be familiar with interest payments in your bank account, but what about "dividends"? Dividends in a bank account are basically the same as interest payments.

The term dividends are most often used at credit unions, as opposed to banks. Credit unions are customer-owned institutions, and they have a language of their own. For example, a savings account at a credit union is known as a "share account" because it represents your share of ownership in the credit union. Also, those accounts pay monthly dividends.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.