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5 Ways to Increase the Yield on Your Savings

After years of paying little to no interest, accounts are starting to offer higher rates

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For most of the past 14 years, the highest return you could get from your savings account was a bland smile from your banker. But short-term interest rates are rising, thanks to the Federal Reserve Bank’s efforts to slow down the economy and squash inflation.

Currently, you can get as much as 3.65 percent on a five-year bank certificate of deposit (CD), according to Bankrate.com. That may not sound like much, but on a $10,000 savings account, that’s $365, which is about $365 more than you’re getting now.

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You have to shop around for those higher yields: The average five-year CD still yields just 0.87 percent. Here are five good places to look to earn additional interest on your money.

1. Bank savings accounts

The average savings account pays next to nothing. A savings account at Wells Fargo, for example, offers you 0.01 percent, which means you could double your money in 7,200 years. You can do better.

Dollar Savings Direct currently offers a savings account yielding 3 percent, with a minimum balance of $1. Quorum also offers a 3 percent savings account. UFB Direct weighs in with a 2.85 percent yield.

You may notice that Dollar Savings Direct and UFB Direct are online banks: You can’t walk into the lobby to open your account. You can, however, open an account online. The money saved on bricks and mortar allows them to offer higher yields than many traditional banks. (Quorum is a credit union.)

Money market accounts are a variant of savings accounts that typically pay higher interest rates and come with check-writing capabilities. However, money market account holders are usually limited to six withdrawals a month, not including withdrawals from automatic teller machines (ATMs). Here again, online banks tend to offer the highest yields.

2. Bank CDs

CD typically offers a higher yield than a savings account or a money market account. That’s because a CD ties up your money for a set period of time, typically three months to five years. You’ll have to pay an early withdrawal penalty if you take money out of your CD before it matures. There is no maximum penalty, but the early withdrawal penalty is typically 90 to 180 days’ interest.

Normally, the longer you tie up your money, the better the yield you get from your CD. Currently, there’s relatively little difference in yield between CDs of various maturities. The national average yield for a one-year CD is 0.82 percent, according to Bankrate, and the average yield for a five-year CD is 0.87 percent. High-yielding CDs of all maturities range from 2.5 percent for six-month CDs to 3.65 percent for five-year CDs.

Most investors want to lock in high current yields with a long-term CD if they think interest rates aren’t going to rise much further. This probably isn’t the time to do that, says Bankrate’s chief financial analyst, Greg McBride. “The Federal Reserve Board is expecting to raise interest rates another 1.25 percent this year,” he said. The Fed has raised its short-term fed funds rate five times this year, lifting it from a maximum 0.50 percent to a maximum 3.25 percent.

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For most people at the moment, the better bet is a high-yielding savings account or money fund. “If you’re a betting person, get the best rate on a savings account now and wait until the Fed goes into pause mode” before locking in yields with a CD, says Ken Tumin, founder of Depositaccounts.com.

3. Treasury securities

Treasury securities, which are IOUs backed by the federal government, also offer good yields. A three-month T-bill yields 3.4 percent, and a one-year T-bill yields nearly 4 percent. Interest from Treasury securities is free from state income tax, but not federal income tax.

Treasury bills, which mature in one year or less, are issued at a discount, much like savings bonds. For example, you may buy a one-year, $10,000 Treasury bill for $9,750 and when the bill matures, the government will pay your $10,000. The profit is your interest. Treasury notes, which have maturities of more than one year and less than 20 years, pay interest semiannually.

You can buy Treasuries from a broker or directly (and for free) from treasurydirect.gov. Most brokerages sell bank CDs as well, and can be a good way to find high-yielding CDs, Tumin says.

One drawback to Treasuries: If you sell your Treasuries before they mature, you may get more or less than the security’s face value. ​

4. Money market mutual funds

money market mutual fund invests in short-term, high-quality interest-bearing securities, such as Treasury bills. Unlike a bank, which can set a yield for a certain period, money funds can only give you as much as they earn, minus expenses. The typical money fund yields 2.57 percent, according to Crain Data, which tracks the yields on the largest funds.

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You will normally see money funds as the cash option in brokerage or mutual fund accounts. When choosing a money fund, look for those with the lowest annual expenses. The less the fund company takes, the more you get to keep.

One caveat: Money funds are designed to keep their share prices at $1, so in theory you can’t lose money. (Money funds, unlike bank accounts, are not covered by federal deposit insurance.) They have an excellent safety record, which was marred in 2008, when the Lehman Brothers brokerage house collapsed, causing the Reserve Fund to fall temporarily below $1 — “breaking a buck,” in money fund parlance.

5. Savings bonds

If you have a long-term outlook and you’re worried about inflation, consider Series I Savings Bonds. Because their yield is adjusted for inflation, Series I Savings Bonds currently pay 9.62 percent. If you buy one between now and Oct. 31, you’ll get that yield for the next six months.

Yields for new I bonds change in November and May, and are adjusted according to changes in the Consumer Price Index (CPI), the government’s main measure of inflation. Given that the CPI soared 8.3 percent over the 12 months ended August, it’s a good bet that the yield on I Bonds issued in November through May will be higher than CD and money market yields. As with other Treasury securities, interest from I bonds is free from state income taxes.

You can only buy $10,000 worth of savings bonds per calendar year — $15,000 if you use $5,000 from your income tax refund. You can’t cash them for one year, and if you cash them before five years, you’ll lose the previous three months’ interest.​