How to Earn More Interest on Your Savings

Shopping around can score some of the highest rates on cash in years

John Waggoner,

AARP

En español

Published March 02, 2023

/ Updated July 26, 2023

Getty Images/AARP

Interest rates on savings — whether for cash stashed in money market mutual funds, bank money market accounts or certificates of deposit (CDs) — are hitting levels last seen in the early 2000s. “I’m just thrilled with all this,” says Peter Crane, publisher of Money Fund Intelligence. It’s especially welcome news for retirees in need of low-risk income to help make ends meet and others seeking a safe place to set aside funds for an emergency.

But not every financial institution is offering high interest rates, even to longtime customers. And even if you invest in money market mutual funds, whose yields float with the short-term market, you have to shop around for the best deal.

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Thank — or blame — the Fed. In an effort to squash inflation, the Federal Reserve has hiked its target for short-term interest rates 11 times since 2021. Its key fed funds rate is now 5.25 percent to 5.5 percent. Typically, savings rates follow the fed funds rate, and you’ll find plenty of CD offers for 5 percent or more.

Some major banks, however, aren’t sharing the love, at least not with all their products. One big bank, for example, offers a nine-month CD yielding a paltry 0.02 percent. Another big bank offers 0.05 percent for a 10-month CD.

One reason: Banks set their own rates according to how much they need money from deposits, which they lend out at a higher rate. Many of the larger banks are flush with cash and in no hurry to lure more deposits at higher interest rates. “It’s a binary world where big banks are offering diddly-squat on a lot of their deposits,” says Ken Tumin, founder of DepositAccounts.com. On the other extreme are online banks, whose rates more closely track the fed funds rate.

Shop for higher interest rates carefully

If you have an account with a big bank, then, you may have to go shopping elsewhere for better yields. You can find current interest rates at websites such as depositaccounts.com and bankrate.com. This may mean having to open an account at a new bank, transferring money from your bank to another new bank, or keeping tabs on when each CD matures.

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If you’re looking for high yields, online banks are usually the place to go — and sometimes their parent companies are big, brick-and-mortar banks. For example, American Express National Bank’s parent is — you guessed it — American Express. Deposits at online banks are generally insured by the Federal Deposit Insurance Corporation (FDIC), and online banks offer many of the same services as traditional banks, ranging from checking accounts and debit cards to money market accounts and CDs. The only thing they don’t offer is a drive-up window — or doors, for that matter. All your transactions have to be done online.

Tumin thinks that the Fed may pause its rate hikes. "It’s not a certainty that rates have peaked, but there’s a significant chance that they have," he says. "To hedge your bets, it can make sense to move some of your cash into a long-term CD now with rates above 4 percent. If rates do fall late this year and in 2024, that 4 percent-plus long-term CD will look very nice."

A money market fund, however, invests in short-term investments, such as Treasury bills, and gives you the current market rates less a management fee, which averages about 0.3 percent, according to Crane. The current average money market fund yield is 4.97 percent. Crane data expects average yields to break 5 percent in the days following the Fed meeting and to approach 5.25 percent by the end of August. Money market funds are not federally insured like most bank deposits, but they have a good track record of safety.

Rolling over CDs

If you opt for CDs, a typical investing strategy is to create a ladder — basically, staggering the maturity of your CDs so that one matures, say, every three months or so. You could simply invest in a six-month CD every three months for a year. If rates keep rising, you’ll reinvest at continually rising rates. If rates fall, you can roll over your maturing short-term CDs into longer-term ones. Keep in mind that there’s typically a penalty for withdrawing money early from a CD, although switching to a higher-rate CD can often be worth the penalty.

You typically get 10 days to decide whether to roll over a maturing CD into another. Banks will often roll over the CD automatically if they don’t hear from you. This can prove costly: The rollover CD may not offer as good a yield as CDs offered to new customers. It’s a bit like the strategy wireless carriers use: giving new customers a better deal than existing ones, Tumin says.

Monitoring CD rollovers and moving money between banks can be a chore, which is a strong argument for money market funds, Crane says. “The funds are charging 0.3 percent and doing all that for you — and giving you check writing and a debit card,” he says.

Higher rates are welcome news for savers. “Back in the 1990s and early 2000s, 5 percent was the norm, and that seemed like the psychologically magic number,” Crane says. “You could live off 5 percent.” And while inflation will erode the value of any interest-bearing account, it does so for any investment. True, 3 percent inflation will do big damage to a CD yielding 5 percent. It does even worse to a stock mutual fund that’s losing 15 percent. “It hits the other 85 percent you have left,” Crane says.

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John Waggoner covers all things financial for AARP, from budgeting and taxes to retirement planning and Social Security. Previously he was a reporter for Kiplinger's Personal Finance and  USA Today.

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