Interest rates have been ridiculously low for a few years now, ever since the start of the Great Recession, which has been terrible for savers. For years, when things were great in the economy, we saw news stories about how Americans weren’t saving enough for the future. Back then, you could get 5% APY certificates of deposit! Now that we’ve been through years of economic malaise, and with Americans saving more, interest rates are abysmal. It’s not uncommon for a bank to give you absolutely nothing in terms of interest (OK, Bank of America will give you 0.01% APY on a checking account… so it’s not technically “nothing”).
If you’re buying a house, these low rates are fantastic! For everyone else, where can you go to get a little higher interest rate without sacrificing your principal? I know a few places and while they won’t give you a tremendous amount of interest, it’s higher than zero and won’t be any riskier.
Reward Checking Accounts
A few years ago, you could get 5% for a reward checking account but lately the rates are closer to 2%-3%. Reward checking accounts are checking accounts that require you to satisfy conditions before they’ll give you the much higher interest rate, especially compared to Bank of America’s awesome rate! They often require you to make a dozen or more purchases with your debit card, establish a direct deposit or bill-pay, sign up for electronic statements and online banking. There are deposit limits too, to limit how much you can earn in interest each month, which is typically in the $15-25,000 range.
Reward checking accounts can pay such higher rates because they take the revenue they earn off the debit transaction fees (which they charge the merchant) and use it to help pay your interest. They also take some of tips from online banks, using electronic statements and bill-pay, to help reduce costs.
Reward checking accounts are with regular banks so they are protected by FDIC insurance.
High Yield Savings Accounts
Online banks like Ally Bank and ING Direct will give you just short of 1% APY when you open an online savings account with them. Most online banks have a minimum account balance of just $1 and there typically aren’t any account maintenance or other such fees. They are FDIC insured, just like a B&M bank, and so they’re just as safe as anything else.
They can pay higher interest rates because online banks have lower overhead and are able to pass that along in terms of higher interest rates for their account holders.
Series I Savings Bonds
Series I Savings Bonds are US government bonds that accrue interest monthly based on rates set twice a year. A Series I bond has a fixed rate component, which stays for the life of the bond, and a floating inflation based rate that is set in May and November of each year. For example, as of this writing, the fixed rate of a Series I bond is 0% and the floating inflation rate is 0.88%, resulting in a yield of 1.76% based on the Series I bond rate equation. You’re limited to $10,000 in Series I bonds each year.
Series I bonds accrue interest but you don’t get that interest, and you don’t pay taxes on that interest, until you redeem the bond. Series I bonds cannot be redeemed within one year and if redeemed before 5 years, you surrender the final three months’ of interest. Lastly, interest is not subject to state and local taxes and exempt from federal income taxes if used for education.
Series I bonds are not technically FDIC insured but they are backed by the full faith and credit of the United States Government, which makes it an even stronger protection.
These are your three best options for earning a little extra money on your savings – you’ll be hard pressed to find a 100% safe alternative that isn’t one of these three.
Jim is the founder of Bargaineering.com, a money blog for young professionals trying to navigate the intricacies of an increasingly complex personal finance world.