Interest rates have been pretty high for the last few years and savers have responded by taking their dollars and moving them to where the interest is, eager to make up for lost time after years of low rates.
Following the 2007-09 recession, low interest rates meant minimal returns on deposits. The pandemic upended this dynamic by disrupting global supply chains, while stimulus payments gave people more money to pay for scarce goods. The upshot was inflation spiking to a four-decade high, which the Federal Reserve attempted to tame with higher interest rates.
While the Fed actually stopped increasing rates in recent months, it has said it will keep rates high until inflation cools further. The silver lining: Some banks are willing to pay customers higher interest rates as a result.
“We’ve had two decades, really, that have not been favorable to savers,” says Scott Cole, founder and president of Cole Financial Planning and Wealth Management in Birmingham, Ala. “People who have parked money in safer vehicles are finally starting to see a little reward.”
However, not all savings vehicles are created equal. Federal Deposit Insurance Corporation data shows that the average savings account rate is a mere 0.45%, there are products out there that deliver returns of 5% or more. With lingering inflation pinching Americans’ wallets, putting your money in an account where it earns interest can help mitigate loss of purchasing power.
While a low-interest-bearing savings account from a big bank is serviceable as a backup to your checking account or as a place to store cash you expect to need imminently, you can earn a lot more with the rest of your cash.
Here are eight low-risk options that generate a return on your money and—to varying degrees—give you the flexibility to access that cash when you need it
- Certificates of deposit
- High-yield savings accounts
- High-yield checking accounts
- Money-market funds
- Money-market accounts
- Treasury bonds and notes
- Treasury bills
- I bonds
Certificates of deposit
Best for: Locking in favorable rates on money earmarked for medium- to long-term expenses
Key facts:
- Insured up to $250,000 per account type if with a FDIC or NCUA member institution
- Average rate on 12-month CD 1.80%, according to FDIC data
- Top fixed Annual Percentage Yield found on DepositAccounts.com 5.51%
Certificates of deposit, or CDs, can be a useful way to earn interest on part of your savings, since they provide the predictability of a fixed rate of return.
CDs tie up your money until they mature, but the upside is that you lock in a favorable yield until the maturity date, regardless of what happens to interest rates in the interim. CD terms range from as short as a month to five years or more, and financial advisors say CDs are great if you’re saving toward a specific goal, such as buying a new car or house.
“If I were going to buy a house and needed to set aside cash for the down payment, I’d happily put it into a CD that matures before I’m going to need it,” Cole says.
For uses without a timeline, such as earning interest on your emergency fund, experts recommend CD laddering—that is, buying CDs with staggered maturity dates and rolling them over when they mature, or cashing them out if you need the money.
If you’re willing to be flexible, you can find the best CD rates on promotional CDs, which can have offbeat terms and may have minimum deposit requirements.
Caveats: The drawback with CDs is that your cash is tied up—you can’t easily take the money out when you need it. “Breaking” a CD, or taking money out before the maturity date, will trigger a penalty equivalent to a set number of months’ worth of interest, which could range from one month’s all the way up to a year’s worth, with longer maturities generally having higher penalties for early withdrawals. Some banks offer no-penalty CDs, but these typically have lower APYs.
High-yield savings accounts
Best for: Generating yield on the liquid cash portion of your savings
Key facts:
- Insured up to $250,000 per account type if with a FDIC or NCUA member institution
- Average savings account rate 0.45%, according to FDIC
- Top APY found on DepositAccounts 4.94%
While there isn’t a technical or regulatory difference between an ordinary, non- or low-interest-bearing savings account and a high-yield savings account, a number of newer, primarily online banks have, in recent years, offered higher than average interest rates to attract customers.
Although the national average savings rate is a mere 0.45%, the best savings accounts today pay 10 times that amount or more with the same flexibility as a traditional account.
“I’m an advocate of high yield savings accounts,” says Cole. He suggests keeping enough to cover about a month of living expenses in your everyday checking account (or a linked savings account), with a few months of expenses in your high-yield savings account.
A high-yield savings account is also a good option if you’re saving up for an expense with an indeterminate time frame—say you’re house hunting and don’t know how long it will take you to find the right property—you’re earning a return but can quickly access the money when you need it. However, some savings accounts limit withdrawals to six a month, so check the bank’s terms and conditions if you expect to make frequent withdrawals.
Caveats: High-yield savings accounts rates are variable, and are likely to fall if prevailing interest rates do. In addition, some banks tier their rates or require a minimum balance to earn the advertised rate.
Also, the best high-yield savings rates are often offered by digital banks and neobanks. If you’re considering putting your money with a nonbank company, make sure it has a partnership with a bank that will provide FDIC coverage.
High-yield checking accounts
Best for: Earning interest on everyday-spending money
Key facts:
- Insured up to $250,000 per account type if with a FDIC or NCUA member institution
- Average interest checking rate 0.08%, according to FDIC
- Top APY found on DepositAccounts 3.43%
If you want to earn interest on the money you use for everyday expenses, a high-yield checking account might be a good fit. While most checking accounts aren’t interest-bearing, a handful of banks offer checking accounts that provide a return on deposits.
While the APYs on high-yield checking accounts tend to be lower than for savings accounts, there are no limitations on withdrawals or transactions. Keep in mind, the highest APYs tend to be offered by digital banks or neobanks, so it is important to make sure you bank with an institution that either has its own ATM network or reimburses other banks’ out-of-network fees.
It is also important to make sure your account is with an FDIC member so your deposits are protected in the unlikely event of a bank failure. Especially if this is an account you rely on to make day-to-day purchases such as gas or groceries, you want to make sure you’ll be able to get to your money with minimal disruption.
Caveats: High-yield checking APYs aren’t as high as you can earn from savings or money-market accounts, and accounts may have monthly maintenance fees, particularly if you drop below a minimum balance. Some may also require a certain number of debit transactions or bill payments a month or make you jump through other hoops.
Savers sometimes prefer CDs or savings accounts that limit withdrawals to help enforce good savings habits. If your money is just a swipe away in a checking account, you need to be disciplined to build savings.
Money-market funds
Best for: Maintaining a pool of liquidity in an investment portfolio
Key facts:
- Average seven-day yield of the top 100 money-market funds is 5.12%, according to Crane Data, which tracks money-market fund performance
- Purchased through a brokerage account
- Not a bank account
- Not FDIC insured
A money-market fund is a type of mutual fund that invests in ultra-short-term bonds. Also called money market mutual funds, you buy these ultra-short-term bond funds through a brokerage account such as with Vanguard or Charles Schwab. They are a good place for investors to hold cash so they can move quickly if they want to allocate it toward stocks, bonds or other assets. Flexibility and liquidity—it’s easy to access your money on short notice should the need arise—also make money-market funds a useful tool for cash management, and the returns they generate can be reinvested.
The share price of a money-market fund—also referred to as net asset value or NAV—is pegged to a dollar, which these funds can do because of the short-term and low-risk nature of their underlying investments. Keep in mind: A money-market fund technically doesn’t earn interest, since it isn’t a bank account. Instead, funds issue dividends that investors can withdraw or reinvest as they choose.
There are three types of money-market funds, which differ in terms of holdings, relative risk and yield: Government money-market funds (lowest yield and risk), prime money-market funds (highest yield and risk) and municipal money-market funds. Depending on your needs and your priorities—earning yield versus reducing your tax burden, for instance—one type of fund might be preferable over the others.
Caveats: Unlike many other savings accounts alternatives, money-market funds aren’t FDIC insured. Although these instruments are designed to be extremely stable, they are not risk-free or guaranteed by the government.
If the value of the underlying holdings in a money-market fund drops sharply and unexpectedly in value, the share value can drop below that $1 threshold, meaning that people could lose some of their invested funds.
This “breaking the buck,” as it is called, is extremely rare, occurring in just two funds in 2008. Research by the Boston Fed, though, found that several dozen money-market funds were at risk between 2007 and 2011. From March 2020 to March 2021, the Federal Reserve put in place an emergency lending program so funds wouldn’t break the buck.
“That’s a huge drawback—there is no FDIC insurance,” says Ryan Derousseau, financial advisor at United Financial Planning Group. “There’s no backstop for you. Sure, maybe the Fed will come in and save you, but you don’t want to rely on that.”
Money-market accounts
Best for: People holding high balances who want spending flexibility and generous interest
Key facts:
- Insured up to $250,000 per account type if with a FDIC or NCUA member institution
- Average rate 0.68%, according to FDIC data
- Top APY found on DepositAccounts 4.76%
Although they sound similar, money-market accounts differ from money-market funds (above) in significant ways. For savers, the most important difference is that money-market accounts are bank accounts covered by FDIC insurance up to the $250,000 limit. (If a money-market account is offered by a credit union, deposits are protected by the National Credit Union Administration.)
In practice, money-market accounts function like a hybrid between a checking account and a savings account. Most offer limited check-writing privileges, and some come with a debit card you can use to make withdrawals.
Money-market accounts tend to have higher APYs than high-yield checking accounts, and lately have been on par with high-yield savings accounts or CDs.
“The advantage of a money-market account is you have access to those funds immediately and there’s not a penalty. It’s pure liquidity,” says Robert Pagliarini, president of Pacifica Wealth Advisors, an Irvine, Calif.-based wealth-management firm.
Caveats: Right now, money-market account paying outs are roughly on par with CDs, but the difference is that money market rates aren’t fixed. “The problem with money-market accounts is they’re adjustable,” Pagliarini says. “If interest rates go down, you’ll earn less.”
And unlike many ordinary savings accounts, some money-market accounts require you to maintain a minimum balance that could be as high as $25,000.
Treasury bonds and notes
Best for: A fixed income stream without the risk of default
Key facts:
- Backed by the full faith and credit of the U.S. government
- Purchased through TreasuryDirect or secondary market
- Minimum purchase amount through TreasuryDirect: $100, sold in $100 increments
- Current yield on the 2-year Treasury note is roughly 4.8%
- Current yield on the 10-year Treasury note is roughly 4.4%
- Current yield on the 30-year Treasury bond is roughly 4.5%
- Interest income is exempt from state and local taxes
Treasury securities, debt instruments issued by the U.S. government, are the bedrock of the global financial system and a safe option for savers looking to diversify their cash position and generate a steady income stream.
Treasury notes, or T-notes, have maturities ranging from two to 10 years, and Treasury bonds, or T-Bonds, have maturities of either 20 or 30 years. Either pay interest every six months until maturity. At maturity, you receive back the face value of the bond or note.
Typically, the longer the maturity, the higher the interest rate or yield a bond or note pays out. The current economy, though, is experiencing what’s known as a yield curve inversion, in which shorter-duration debt has a higher yield.
T-notes and T-Bonds are auctioned off in $100 increments and can be bought directly through the government’s TreasuryDirect portal. You can also buy or sell before maturity on the secondary market through to brokers or other financial institutions
“The advantage with a Treasury is these are backed by the U.S. government, and there are no fees to purchase or sell,” Pagliarini says. “And you can ladder out the same as you would with CDs, so you can lock in a rate for a shorter or longer period of time.”
Caveats: Buying Treasury bonds or notes isn’t a substitute for a savings account: Selling before maturity might mean incurring a loss of principal, since market prices fluctuate. Treasurys also have interest rate risk, meaning that a note or bond purchased in a low-interest-rate environment might earn less than one newly purchased if interest rates are rising.
Treasury bills
Best for: Risk-free returns and short-term liquidity
Key facts:
- Backed by the full faith and credit of the U.S. government
- Purchased through TreasuryDirect or on the secondary market
- Current yield on the three-month Treasury bill is roughly 5.45%
- Current yield on the one-year Treasury bill is roughly 5.1%
- Interest income is exempt from state and local taxes.
Treasury bills, or T-bills, are short-term debt securities issued by the U.S. government with maturities ranging from four weeks to one year. Since they are backed by the full faith and credit of the federal government, T-bills are a safe and secure way to hold cash, and are particularly useful if you need a place to park funds you expect to need soon.
The short duration of T-bills in comparison to longer-dated Treasurys and most CDs gives investors flexibility, making T-bills a good place to keep money in anticipation of funding a near-term expense such as a college tuition bill coming due.
Because of their short maturities, T-bills don’t pay out interest, but the government prices them for auction below their face value. Investors can earn money by buying T-bills at a discount, holding them to maturity and collecting face value. For example, say you buy $1,000 in T-bills for $970. At maturity, the Treasury pays you back the face value, so you earn $30 in interest.
Along with T-notes and T-Bonds, T-bills can be laddered so that you’re reinvesting them on a regular basis, but have the option of just taking the money at maturity if you need it.
Caveats: As with their longer-dated counterparts, T-bills are best considered an add-on rather than replacement for a savings account. They also typically offer lower returns than you could recognize with high-yield deposit accounts, especially for shorter maturities.
I bonds
Best for: Long-term inflation protection
Key facts:
- Backed by the full faith and credit of the U.S. government
- Purchase through TreasuryDirect
- 30-year maturity
- Annual purchase limit of $10,000 per person
- Interest rate adjusts every six months
- Current yield is 4.28%
- Interest income is exempt from state and local taxes
In an era of high inflation, I bonds can offer an attractive return combined with low risk. These debt securities issued by the U.S. government are specifically designed to combat rising prices. I bonds have similarities to Treasurys, but there are some significant differences.
The interest rate you earn on an I bond is composed of two parts: A fixed rate and a variable inflation rate tied to the Consumer Price Index. The Treasury Department announces new rates every May 1 and Nov. 1 to reflect the current inflation situation. Bondholders’ rates adjust twice-yearly depending on when the bond was purchased.
In an era of high inflation, I bonds can offer an attractive return combined with low risk. These debt securities issued by the U.S. government are specifically designed to combat rising prices. I bonds have similarities to Treasurys, but there are some significant differences.
The interest rate you earn on an I bond is composed of two parts: A fixed rate and a variable inflation rate tied to the Consumer Price Index. The Treasury Department announces new rates every May 1 and Nov. 1 to reflect the current inflation situation, and bondholders’ rates adjust twice-yearly depending on when the bond was purchased. Today’s 4.28% rate is good through Oct. 31, 2024.
Interest is compounded twice a year and accrues throughout the term of the bond. You get that money when you cash in the bond or when it matures in 30 years. You can’t cash out I bonds for the first year you hold them, and if you cash them out anytime within the first five years, you’ll pay a penalty equivalent to three months interest.
Caveats: As is the case with Treasurys, you can’t use I bonds as a substitute for a savings account. One limitation is the 12-month lockup period. “That’s an issue if we’re talking about savings,” Derousseau says.
You need to buy I bonds directly from the government rather than through a broker. TreasuryDirect.gov is the most convenient way, although it is possible to buy paper (rather than electronically issued) I bonds using your tax refund. You also can generally only buy $10,000 worth of I bonds each year.
How to choose
Deciding which instrument—or instruments—will be the best place for your savings entails thinking about your short- and long-term savings goals, cash flow needs and overall finances. If you’re trying to save money to buy your first home, for instance, your focus and priorities are going to be very different than if you need a secure income stream in retirement.
Financial advisors encourage people to think about a combination of savings instruments rather than approach the question as a binary either-or. You might, for instance, keep a portion of your emergency savings in a money-market account or a high-yield savings account, and the remainder in a series of CDs laddered to mature at regular intervals in case you need to start drawing down your savings in the event of a job loss or other financial crisis.
Will my money be safe?
There’s more to the best savings account alternatives than just high rates. Making sure your money is protected—by FDIC insurance, for example—is also crucial.
An exodus from regional banks was accelerated by the collapse of Silicon Valley Bank, Signature Bank and First Republic Bank, events that rattled depositors’ confidence and served as a sharp reminder that while the U.S. banking system remains on solid ground, it’s still smart to conduct some due diligence on the institutions you entrust with your cash.
To be clear: Despite a few high-profile regional bank failures in recent years, the U.S. banking system is fundamentally sound.
If you have money parked in a checking, savings or money-market account, or in CDs, and the institution is a member of either the FDIC or NCUA, you can rest assured that your money is protected up to $250,000 per account type and per institution. (If you’re not sure, you can check with the FDIC’s BankFind tool or the NCUA’s Credit Union Locator.)
If you need to keep a lot of money in cash or cash equivalents, you can spread your deposits among several institutions to stay under the $250,000 limit, or you can use different configurations—such as an individual savings account plus a joint savings account—to keep your money insured.
Treasury securities of any maturity length aren’t covered by the FDIC, but they are backed by the full faith and credit of the U.S. government and are among the most widely used safe-haven assets in the world.
Money-market funds are also considered safe investments, particularly those that limit their holdings to government-backed and municipal bonds. Funds that also hold private-sector debt offer higher yields to compensate for the (still minimal) risk that, in a crisis, your savings could lose value.
All rates and yields are accurate as of May 22, 2024.
More on Savings
- Best Savings Account Rates
- What is a CD Ladder?
- How Much Should I Have in Savings
Meet the contributor
Martha C. White
Martha C. White is a contributor to Buy Side from WSJ.
