Where to Keep Your Savings to Accrue Interest

An illustration of a jar filled with coins and a plant sprouting from the top with a person watering it, representing a headline and text that reads: Top Ways to Accrue Interest on Your Savings, including: "High-Yield Savings Account - Commonly found at online banks, APY rates as high as 5%," "Certificates of Deposit - Money is less accessible than savings or money market account, Opportunity for long-term interest, and banks may offer higher interest rates for larger balances," "Money Market - Higher interest rates, or tiered rate structure based on balance," and "Savings Bonds - Bonds offer credited interest each month, Fully backed by faith and credit of U.S. government."

The Balance / Bailey Mariner

Savings accounts offer an opportunity to grow your money without the risks associated with stocks or mutual funds. 

Setting up an automated 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 what's the best place to save money? There are many savings vehicles to choose from, and it's important to know where you can find the best rates. 

Traditional Savings Accounts

A savings account at your local bank or credit union is typically 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. 

You can typically expect to earn an annual percentage yield (APY) on savings ranging from 0.01% to 0.30% at brick-and-mortar banks. To put that in perspective, suppose you were to put $10,000 into a savings account with a 0.02% APY. After one year, you'd have earned about $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. You can often link them to your checking account for protection if you accidentally overdraw. But those features may not compensate for low-interest earnings

In March 2020, the Federal Reserve lowered interest rates to close to 0%. This impacts the interest rates financial institutions are offering on accounts.

High-Yield Savings Accounts

High-yield savings accounts are similar to regular savings accounts with one key difference: they offer a higher APY for savers. These high yield savings accounts are most commonly found at online banks, which means you sacrifice the convenience of branch banking. The higher rates may be worthwhile, though.

Going back to the $10,000 balance in the previous example, at 1.5% APY, you'd earn over $150 in interest, which is exponentially higher than what you might earn with traditional savings. 

Of course, you 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, and then transfer the money to online savings. Mobile check deposit can simplify things, but you may have to wait a few days 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

You may encounter another savings vehicle called a "money market." There are two different kinds of money market accounts: money market savings accounts and money market mutual funds.

Money market savings accounts 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. Second, they may also come with check-writing privileges or debit cards.

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 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, which 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 a higher interest rate than savings, you don't get to keep all those earnings once fees are factored in.

Certificates of Deposit

A certificate of deposit (CD) is another place to save money that's routinely offered by banks. 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 penalty-free.

You can purchase a CD with 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 0.19% as of September 2020. A five-year jumbo CD yielded 0.41%, and the average savings account yielded 0.05%. While CD rates may be higher, they also tend to have higher minimum deposit requirements. 

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. That can be a good thing, since it encourages you to leave the money alone, but it can be a hindrance in an emergency. 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

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 when the bond reaches its maximum value. In most cases, that 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 before 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. Treasuries 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 September 2020, for example, the 10-year Treasury yield was 0.72%. 

Which 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 that 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.

Frequently Asked Questions (FAQs)

Where is the best place to save money for splurging?

If you want to set aside money to splurge on impulse buys, your priorities should be capital preservation and liquidity. Savings accounts—either traditional or high-yield—will likely be your best options to make sure the money is available when you want to spend it.

Where is the most tax-efficient place to save money?

Of the options detailed here, bonds are the most tax-efficient option. Federal bonds are usually exempt from state and local taxes. Municipal bonds might be tax-exempt on all levels, but they aren't generally considered as safe federal bonds.

Article Sources

  1. Federal Reserve Bank of St. Louis. "National Rate on Non-Jumbo Deposits (Less than $100,000): Savings."

  2. Board of Governors of the Federal Reserve System. "Open Market Operations."

  3. FDIC. "Weekly National Rates and Rate Caps—Weekly Update."

  4. Board of Governors of the Federal Reserve System. "Selected Interest Rates."