How to Earn More Interest on Your Money

Why do banks pay interest to their customers?

If you’ve ever wondered why banks pay their customers interest on the money in their savings accounts, the answer may be simpler than you think. When you open a savings account, money market account, CD or other type of deposit account, you’re forming a partnership with your bank. The bank can lend your money to borrowers in the form of loans, mortgages or credit cards, and in return you’re paid interest.1


Compound interest formula

Let's go over the compound interest formula and define each of the variables.

P(1 + R/N)^(NT) = A

  • Principal: P is the investment or principal balance at the start of the investment. If you use a spreadsheet or a financial calculator to calculate interest, principal is also known as present value. 
  • Rate: R is the interest rate earned on the investment.
  • Number: N is the number of times per period that interest is compounded. For example, many savings accounts compound monthly but have an annual interest rate.
  • Time periods: T is the number of time periods.
  • Account value: The formula is used to calculate the account value. This variable is also known as future value.  

Let's say you invested $10,000 in a savings account offering 1% interest compounding monthly. After five years, you would calculate the savings amount like this:

$10,000(1+.01/12)^(12*5) = $10,512.49

Who Offers The Best Money Market Rates?

The best money market rates will vary depending on the bank and the current market conditions. However, some of the most popular banks that offer high-interest rates on their money market accounts include Ally Bank, Discover Bank, and Capital One 360.

Who benefits from compound interest?

Both financial institutions and consumers benefit from compound interest. Banks pay compounding interest to consumers at low interest rates in exchange for not withdrawing funds and simultaneously lend the deposited money to earn attractive streams of interest income.

Consumers can use compound interest in either the accounts discussed above or with stock returns to turn a relatively small nest egg into a healthy retirement account over time.

Whats The Difference Between A Bank And A Credit Union?

The main difference between a bank and a credit union is that a credit union is a nonprofit organization while a bank is for-profit. In addition, credit unions typically have lower fees and interest rates than banks. Finally, credit unions are typically more localized than banks.

4. Switch to a high-interest savings account

Some banks offer special, high-interest savings accounts that can offer much higher rates than traditional accounts.

One of the best places to look for high-interest savings accounts is online banks. Online banks, which benefit from lower costs with the elimination of brick-and-mortar branches, rarely charge monthly fees and offer rates that are often much higher or more compared to traditional banks.

Another benefit of working with online banks is that it keeps your savings out of sight and out of mind, making it easier to resist the temptation to spend your savings funds.

2. High-Yield Savings Accounts

High-yield savings accounts are a type of savings account, complete with FDIC protection, which earn a higher interest rate than a standard savings account. The reason that it earns more money is that it usually requires a larger initial deposit, and access to the account is limited. Many banks offer this type of account to valued customers who already have other accounts with the bank.

Online high-yield bank accounts are available, but you will need to set up transfers from another bank to deposit or withdraw funds from the online bank. It’s worth learning how to find and open these accounts. And make sure to shop around for the best high-yield savings account rates to ensure you’re maximizing your savings.

The maximum insurable amount in an FDIC-insured bank account is $250,000 per depositor, per bank.

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.

Open A Workers Credit Union SaveUp Savings Account For 3.56% Interest On Up To $1,000 

Workers Credit Union is a federal credit union based in Massachusetts, but that is available nationwide. Their SaveUp Savings Account offers 3.56% interest on up to $1,000. 

Opening the account isn’t difficult. I applied for the account online, then received a phone call the next day to verify some information. I then had to send them some verifying documents via email. It’s a bit weird having to do that since it seems like they could have gotten that information during the application process, but I’m fine with it.  

Workers Credit Union does have a fee schedule that is a bit weird, but so long as you do it right, the fees should never apply to you. The first fee to worry about is an inactivity fee, which is charged if you have no debits or credits within 365 days. This shouldn’t be a problem for most people since you’re probably going to be withdrawing the interest you earn in this savings account. So long as you withdraw your interest at least once per year, you shouldn’t have any issues. 

The second, more annoying fees are related to ACH transfers. If you initiate an ACH transfer from the Workers Credit Union website, you’ll get charged an ACH transaction fee. To avoid this fee, make sure to initiate all of your ACH pushes and withdrawals from an external bank account. For example, I have my Ally bank account linked to Workers Credit Union and I do all my ACH transfers from the Ally website. By doing this, I’m able to deposit and withdraw money from Workers Credit Union without incurring any fees.

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.

8. Try a money market account

Money market accounts offer a mixture of the features found in savings and checking accounts. They pay interest, sometimes at higher rates than high-yield savings accounts, while offering check-writing privileges and debit cards that you can use to make withdrawals, with some restrictions.

The drawback of money market accounts is that they often have higher fees and minimum balance requirements than savings accounts. There is also no guarantee that your bank’s money market account pays a better rate than its savings account.

4. Open a Business CD

A certificate of deposit (CD) is a type of savings account that provides a higher-yield interest rate in exchange for leaving a deposit untouched for a specific period. Like other accounts on this list, a business CD offers a lower risk than investments but a higher yield than an interest-bearing checking or savings. Some CDs offer rates of more than 3%

There are no regular transactions with a CD. You cannot withdraw or deposit into a CD, and if you need to terminate one early, there are often financial penalties. However, if your business has reserves that aren’t needed for upcoming expenses, CDs are a great way for those reserves to earn you money.

First Internet Bank is a great choice for a CD as it offers rates of 0.35% on a three-month CD and over 3% on a 60-month CD. For more information, visit the company’s website.

PROS CONS Often earn higher interest rates than interest-bearing checking and savings accounts Don’t allow you to make regular transactions (deposits and withdrawals) Allow you to take reserve funds not earmarked for upcoming expenses and earn money on them Most banks charge a financial penalty for withdrawing early from a CD, which can include some or all of the earned interest

How do I find the best high-yield savings accounts?

Shopping around for the right high-yield savings account is key. As we mentioned, some have minimum monthly balance requirements depending on the account. Some may also come with monthly maintenance or other associated fees, which can quickly add up. Make sure you read all the fine print.

Some accounts, for example, require you to maintain a minimum balance that would earn you at least one cent each month based on the Annual Percentage Yield (APY). Other accounts offer a competitive rate when you deposit at least $10,000 and maintain this balance for as long as the account is open.

With other banks, you may find that you don’t have to pay a monthly maintenance fee, but there may be other fees associated with the account, like fees for domestic wire transfers, overdrafts or returned deposit items.

When it comes to interest, the rate you’ll receive varies depending on interest rates set by the Federal Reserve that banks use to calculate the APY for savings and investment products. But if you shop around, you’ll generally be able to find traditional brick-and-mortar banks, online banks and credit unions that offer high-yield savings accounts with an APY of about 0.5%, though some higher rates may be available.

Earn a high-yield savings rate with Credit Karma Money™ Save Start Saving

2. Open an Interest-bearing Business Savings Account

While interest-bearing business checking accounts are a little less common for entry-level accounts, interest-bearing business savings accounts are standard across many financial institutions. When looking for the best business savings account, finding the one with the highest APY is often the objective.

Savings accounts usually have fewer high-end limits on balances that earn interest, although some have tiered accounts that offer different APY based on the balance amount. One thing to watch for with savings accounts is transaction limits and fees. Some business savings accounts are still limited to six monthly withdrawals and transfers and charge high fees for going over that amount.

If you’re looking for an interest-bearing savings account, Live Oak Bank is a great choice. It offers 1.05% APY on its savings account with no monthly fee and no minimum opening deposit requirement. To open a savings account, head over to its website.

PROS CONS Great way to earn money on your primary business checking account Can have limits on how much money you can earn interest on Many offer no transaction limits or at least higher transaction limits than savings accounts Can be hard to find business checking accounts that offer a good APY rate

What Is the Savings Account Withdrawal Limit?

Due to a federal law called Regulation D, there is a savings account withdrawal limit. You can make no more than six withdrawals per month.

4. Money Market Account

A money market account is a type of savings account that typically earns higher interest than an ordinary savings account. Money market account returns are modest, with an average APY of 0.07% in December 2021.

A major benefit of a money market account over some other similar savings vehicles is that money market accounts leave your money liquid, and some even offer bankers the ability to write checks. Some people use money market accounts to house money needed soon, such as for a holiday gift budget or a vacation fund. The FDIC insures money market accounts.

How much should I be saving?

Your financial situation is unique, but the general rule of thumb is to have at least three to six months’ worth of your total monthly budget saved in cash. A good starting place for saving is to create an emergency fund, which can help in case of unforeseen events like a job loss or major home or car repair.

Without savings, you might be tempted to turn to credit cards to pay for day-to-day expenses. But this could end up being expensive if you can’t pay in full each month and can be damaging to your credit scores as your utilization rises.

Open a 5% Interest Savings Account With Service Credit Union

Service Credit Union is another credit union that has a savings account that offers 5% interest. It only earns 5% interest on the first $500 in your account, so keep that in mind. Still, if you and a partner open an account, you’ll have another $1,000 safely earning 5% interest.

Interest in this savings account is paid monthly and there are no fees or account minimums to worry about. Also, because this is a credit union, all of your funds are insured by the National Credit Union Administration, so your funds are safe. My own experience with Service Credit Union has been very positive and this is an account I can recommend even as a primary checking account. 

Here’s how to open your account:

  1. First, you need to join the American Consumer Council (ACC). Go to the ACC membership website to get your membership. Enter the code “consumer” in the membership code section for a free membership (if “consumer” doesn’t work, then try entering the code “service”). You’ll then get an email with your membership certificate. 
  2. After getting your ACC membership, go to the Service Credit Union website, click the “Open Now” box, and then click “New Member Account.” 
  3. Under “Select Your Eligibility,” click the box that says you are a member of the American Consumer Council. Then enter your ACC membership number found on the membership certificate that was emailed to you. 
  4. Under required products, choose Primary Savings. You should also open the Holiday Club Account, which offers 3% interest on up to $3,000.
  5. On the final application page, you can upload documents before submitting your application. The documents you’ll want to upload are (1) your ACC membership certificate, (2) a picture of the front and back of your driver’s license, and (3) something to verify your address, such as a utility bill or home insurance policy. You don’t have to do all of this at this point in the application, but if you don’t, you will receive an email from someone at Service Credit Union asking you to send them this information before your account can be approved. 
  6. Even if you upload all of the required documents, you may still get an email from the membership department asking you to send them these documents. Just keep an eye out for this email and send any documents as requested.
  7. Once approved, you’ll get a welcome email with your member number. To set up online access, go back to the main Service Credit Union website and sign up for online banking. To sign up, you’ll need your member number and your “Call 24” pin. Your PIN is the last four digits of your SSN. Once you enter this info, you’ll be able to set up your username and password to access online banking.

If you open the 5% interest savings account plus the 3% interest Holiday Club Account, you’ll have $500 earning 5% interest, plus an additional $3,000 earning 3% interest. Obviously, if you have a spouse or partner, you can open accounts for them as well, adding an additional $500 and $3,000 of high-yield savings. I have both of these accounts maxed out for me and my wife.

Strategies and Accounts

Two things need to be considered when looking at interest-bearing accounts for savings: How soon will you need to be able to access the money and how easily can you withdraw the money when you need it? Long-term accounts like certificates of deposit (CDs) can't be withdrawn whenever you want because they have term limits, but a high-yield checking or savings account can be liquidated quickly when you have an emergency or reach your savings goal. Retirement accounts are also a good way to save money but remember that you can't access the funds without penalties until you have reached a certain age.

Another thing to look for is automation. "While millions of Americans have been with their bank for years, 2021 is the year to move your money to places that offer dramatically higher interest rates and much more intuitive ways to save. When looking to build savings, automation is critical," says Hamilton. "There are a number of new banks that have automatic or built-in functionality that works in two ways—rounding up every purchase and depositing a few extra cents or dollars in your saving account, or automatically taking a percentage of your direct-deposited income and placing it in savings. Making a choice to save requires effort, whereas auto-save simplifies things and removes a lot of heavy lifting." Then, all you have to do is compare the interest rates and choose the one most beneficial to you.


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