How to Earn More on Your Cash
This past year, we’ve seen significant increases in inflation. Prices have skyrocketed and everyday purchases have become harder for many of us. To ease the financial strain, the Federal Reserve raised interest rates, hoping to help deter borrowers, incentivize savers, and strengthen the dollar.
These higher rates have widespread financial consequences, from impacting mortgage rates to money lenders offering higher interest rates on loans.
If you only get your news from social media or word of mouth, you might believe that everything is doom and gloom, consider a second job, or even unretire.
Luckily, there are silver linings! And you won’t need a side hustle to earn extra money. In fact, you have several options for taking advantage of rising interest to earn passive income!
And, with the Fed saying they’ll continue to raise rates into 2023, right now is the perfect time to get started.
But, much like planting a seed, it’s helpful to know where to put your cash and how to nurture it in order to get it to grow the best.
So, let’s dive in!
The problem with savings accounts
Savings accounts are a useful tool for stashing away money for emergencies, saving up for a large purchase, and earning interest on your deposits. However, savings accounts usually come with low interest rates—sometimes as low as 0.03%—that fall far short of the rate of inflation.
Because of this, the value of the money in your savings account depreciates over time—and often at a significant rate. And the higher inflation rises, the worse it can become.
However, there are some alternative options that can help increase your yields with minimal effort on your part.
These high-interest accounts offer the familiar mechanics of the bank accounts you already use with the benefit of increased interest and higher earnings. Each account brings its own rules, requirements, and potential earnings, so consider shopping around to find the one that best suits your goals and needs.
High-yield savings accounts
High-yield savings accounts (HYSAs) are savings accounts that offer higher interest, or annual percentage yield (APY), than traditional savings accounts, typically ranging anywhere from 2 to 4% or more. HYSAs earn more because the interest in your account compounds, earning interest on both your principal amount and the interest you’ve earned. The rate at which your interest compounds varies, typically ranging somewhere between daily, monthly, and yearly.
Because traditional savings accounts have lower APYs and only earn interest on your principal deposits, HYSAs can earn more money, much more quickly.
Though they offer higher yields, HYSAs do come with some limitations. You can only make 6 transfers or withdrawals of any sort out of your account each month. Any more than 6 and you risk paying a fee or having your account closed entirely.
Some banks offer HYSAs with no opening fees or balance minimums; others carry fine print that require both. APYs can vary by location. Online banks often offer the highest yields, as they don’t require cash-on-hand to operate or maintain brick-and-mortar locations.
Please keep in mind that, though they might offer higher interest on your cash, their APYs could still fall below the inflation rate. Still, HYSAs are a great way to build cash for shorter-term goals, such as stashing away emergency funds or saving up for a big purchase (a car, a down payment on a house, etc.).
Like most bank accounts, the FDIC insures HYSAs up to $250,000, protecting your account (up to that amount) from bank failure.
If you’re interested in a HYSA, the Federally Insured Cash Account (FICA) that we offer our clients is flexible, has a competitive APY, and offers high insurance levels (100x the FDIC limit), with no account fees, minimums, or transaction limits.
High-yield checking accounts
Like HYSAs, high-yield checking accounts offer high APYs, usually between 1-4%. Compare this to traditional checking accounts, which rarely offer any interest at all.
While high-yield checking accounts can help you build money on your cash, they do come with some strings. Primarily, you usually need to take a few monthly actions to keep your account. These often take the form of a minimum number of debit card transactions (typically between 6-12, depending on your bank) and at least one monthly direct deposit into the account.
Many high-yield checking accounts limit how much of your money can earn interest, usually only earning interest on up to $10,000. Once your account grows above this amount, the APY either drops precipitously or disappears altogether.
Money market accounts
Money market accounts (MMAs) offer a hybrid option between high-yield savings and checking accounts. A typical MMA’s APY falls somewhere above a traditional checking or savings account but below other high-yield accounts. On average, a money market might earn between 0.06% on the low end to 1.5% on the high end.
Most MMAs offer limited checking and debit card options, giving account holders access to their funds when needed. However, they usually come with similar transaction limits to high-yield checking accounts—around 6 withdrawals per month—and high minimum balance requirements. As a deposit bank account, MMAs are FDIC-insured up to $250,000.
Another option is the similarly named money market fund. These funds are investment accounts that offer low-risk investment options, such as in mutual funds. Like other low-risk, high-yield accounts, money market funds are best used for short-term savings goals. However, as investment accounts, money market funds are not insured by the FDIC.
CDs and Bonds
These CDs and bonds are purchases you can make from banks, other financial institutions, or directly from the government. They work differently than most bank accounts. Misunderstanding the mechanics of these purchases can cause a lack of access to your funds, or worse—significant penalties for early withdrawals.
Certificate of deposit
When you purchase a certificate of deposit (CD), you’re buying a locked-in interest rate for a specific period, or term. Terms can range anywhere from 3 months to 5 years. Usually, the longer term your CD, the higher interest you earn.
Some CDs can offer interest rates higher than other high-yield options. However, there’s a catch: in exchange for these higher, locked-in rates, account holders cannot access the funds in their account with checks or debit cards. CDs are intended to be held until they mature. Therefore, making any withdrawals or transfers out of the account results in penalty fees.
That said, CDs are federally insured and typically believed to be one of the safest ways to earn money on your cash for near-savings goals.
A popular strategy for those who invest in CDs is building a CD ladder. A typical CD ladder is composed of several CDs, each with its own term period and interest rate. As each CD matures, you then use those funds to buy a new, longer-term CD, and continue the ladder. By doing this, you can potentially continue growing your earnings indefinitely.
I bonds are Treasury-issued investments that protect your money against inflationary losses. They use a composite interest rate, which combines a fixed rate and a variable rate that changes twice a year (in May and November) that follows the rise and fall of inflation. The interest on I bonds compounds, with earned interest being added to your principal investment twice a year. As an added incentive, I bond earnings are exempt from state and local taxes.
I bonds come with a few drawbacks. Once you purchase an I bond, you must hold the bond for at least a year before you cash out. If you cash out before holding the bond for 5 years, you lose the most recent 3 months of interest growth. The Treasury limits I bond purchases to $10,000 per year per individual. However, you can use your tax return to purchase an additional $5,000 in I bonds every year.
I bonds are a good way to protect your cash over the long term, with an initial maturity period of 20 years and an extended maturity period of 10 years, with the bond fully maturing after 30 years.
Bonus option: pay down your debt!
This is actually one of our favorite savings tips for retirees, as paying off debt can also eliminate the high interest associated with it.
For instance, credit cards can often have interest rates much higher than inflation, the Fed’s interest rate, and other forms of debt (like home loans). Paying down debt like this can not only save you a lot of money in long-term interest, it can also help reduce your credit score—potentially reducing interest rates on future loans you might require.