According to Bankrate.com, the average bank money market account is yielding 0.11 percent annually, which is actually an increase over the past year. Contrast that with the many money market mutual funds and bank checking accounts still yielding 0.01 percent or even zero.
Two strategies I've used for over a decade are finding the highest-paying money market accounts and savings accounts, and the highest-paying certificates of deposits that also happen to have a low early withdrawal penalty. Here's more on both.
First and foremost, always use a bank insured by the FDIC or a credit union insured by the NCUA. Both are independent agencies of the U.S. government, and individual accounts are insured to $250,000 per institution, while joint accounts are insured for twice that amount.
Afraid of commitment
If you don't want to tie up your cash, then a money market account or savings account may fit the bill. As of this writing, Bankrate.com and DepositAccounts.com list accounts yielding as much as 1.2 percent annually. Because time is important to me, I typically stick to banks with a history of paying higher rates rather than moving money to a different institution every time a teaser rate ends. High-rate payers include online savings accounts at Synchrony Bank and Ally Bank yielding 1.05 percent and 1 percent, respectively.
Though these rates may seem ultra-low, if your cash is currently earning nothing, the Synchrony Bank account translates to an extra $105 annually on each $10,000 deposited, or $1,050 on each $100,000. Not bad pay for, say, a half hour of your time.
Earn more with a little commitment
Certificates of deposit pay higher rates than money market accounts, but I'm not big on tying up my money either, and doing so for five years makes me a bit nervous. However, buying a certain kind of CD can help you reframe your thinking.
For example, a five-year CD at Sallie Mae Bank yields 2.1 percent and has a 180-day early withdrawal penalty. (That means you'd lose 180 days' worth of interest if you cash in early.) But I think of it instead as a one-year CD yielding 1.05 percent (the amount I'd earn after paying the penalty) that comes with an option to leave the money invested earning 2.1 percent annually for up to four more years.
You can find some of the highest-paying rates at Bankrate.com or DepositAccounts.com, and the DepositAccounts calculator can help you figure the earnings after paying any early withdrawal penalties.
Go for it all
Perhaps my favorite feature on the DepositAccounts website is the "Where to (Safely) Grow Your Cash" calculator. It showed me that over five years with a $10,000 deposit, I could earn as follows:
- Savings account: $599, if rates stay the same.
- A five-year CD: $1,270.
- Willing to go for it all: $2,639.
The last of the three requires the extreme effort of opening multiple reward-type checking accounts and making a minimum number of debit card charges every month. I wouldn't go with that option, as I have other things I'd rather do with the time it would take. It might be right for you, however.
Another option for stashing your cash is in short-term bond funds. Vanguard's Short-Term Treasury Fund (VFISX) yields 0.68 percent, but would lose about 2.3 percent if rates went up by 1 percentage point. That's because bond prices, and the prices of funds that invest in bonds, fall when interest rates rise. Another alternative, generally better than CDs, is to pay down your mortgage, as long as you have enough extra money to do so. That can generally be like earning 3 to 6 percent, depending on your mortgage rate.
Don't let today's low interest rates discourage you. Fight inertia and don't allow others to profit by paying you peanuts. Spend an hour or two using some of the tools discussed above, and stash your cash where it will work hard for you. Take time to read the fine print on money market account and CD disclosures, and make sure the institution doesn't reserve the right to retroactively change any terms after an account is opened.
Allan Roth is the founder of Wealth Logic, an hourly based financial planning firm in Colorado Springs, Colo. He has taught investing and finance at universities and written for Money magazine, the Wall Street Journal and others. His contributions aren't meant to convey specific investment advice.