Linda @ The Cents of Money
When you save money, you want to put it in a safe place, have easy access, and earn interest. You don’t want to stash your cash in pillowcases, under your bed, or in a shoebox. Managing your savings in interest-bearing accounts is crucial for maximizing interest earnings while minimizing fees across all your funds.
What is an interest-bearing account?
To accomplish these needs, you want to deposit this money into an interest-bearing account at your bank. They will pay interest as a percentage of your bank balance. These accounts are the safest and most liquid assets to manage and free from financial risk. They are part of your net worth, and more importantly, your liquid net worth.
Who provides monetary asset management? Depository institutions are financial institutions that can legally offer checking and savings accounts, credit cards and make loans. These banks that provide FDIC insurance up to $250,000 per person per account on deposit funds are regulated banks. They include commercial banks, community banks, savings banks, and online banks. Similarly, credit unions give their customers similar services but are NCUA-insured by the National Credit Union Administration.
Whether your bank is a traditional brick and mortar institution, or an online bank, they hold and use this funding source to make investments or loans to consumers. Loans and fees are a significant income source for depository financial institutions. Online banks may be a better choice to stash your money as they have favorable features like mobile apps and offer higher interest rates given their lower overhead costs.
Your Money Is Safe
When they use our money, it never disappears from our accounts. No worries. Our banks’ interest-bearing accounts are FDIC-insured up to $250,000 per account and are safe. The annual percentage yield (APY) reflects the interest rate you will earn. This is the return on total interest on a $100 deposit for 365 days, given the financial institution’s simple annual interest rate and the compounding frequency.
Compound Interest
Typically, banks use compound interest, which is earning of interest on interest. The compounding effect helps your money to grow faster. Interest gained incrementally gets added to the principal balance, and over time your money grows more quickly. The compound frequency can range from daily, monthly, quarterly, or annually. The more frequent the compounding, the more money you will earn. Many banks compound daily or monthly but that won’t make a massive difference at current low rates.
Generally, when you earn more interest on specific accounts, there may be tradeoffs. You will encounter more limitations-less frequent withdrawals or transactions-in return for higher APY. Be aware of initial minimum deposits and ongoing balance minimums you may need to maintain. Should you exceed these restrictions, you may be paying more fees which can be costly.
 Consider These Factors Before Opening An Account
What are the applicable interest rates you will earn, fixed or variable, and compounding frequency?
Are there required deposits and ongoing minimum balances to maintain and fees to pay?
Can you link to a checking account at the respective bank?
How convenient are the deposit options such as using a mobile app, ATM, or mail?
Can you access your money, and what potential limitations are there?
What fees or penalties does the bank assess on my banking accounts? Are they avoidable?
Types of Interest-Bearing Accounts
Traditional Savings Account
The plain-vanilla savings account is a good starting point for making your deposits. The national interest rate for these savings accounts was not very exciting to earn interest when the Fed brought down its fed funds rate to 0.0%-0.25%. When inflation rates soared to 9.2% in 2022, the Fed raised its interest rates to over 5.5% in July 2023. The Fed is now reversing its policy by cutting its interest rates to 3.50% to 3.75%. High-yield savings bank top interest-bearing account rates are over 4% to 5% in 2026, but likely will come down as the Fed continues to cut rates later in the year.
You can link your savings account to your checking account to transfer funds, pay bills, and provide liquidity. Some consumers may prefer to keep their savings and checking accounts at different locations to slow their spending.
Think of your savings accounts for short-term money needs because they offer the lowest interest rates among bank products.
High-Yield Savings Account
Typically, the high-yield savings accounts earn higher interest rates than the traditional savings accounts. NerdWallet pegs the latest national APY for high-yield savings accounts at 4% plus.Â
Although traditional brick-and-mortar banks and online banks offer high-yield savings accounts, the online banks may be more generous for your deposits, given their lower overhead costs.
Emergency Funds
These accounts are excellent for establishing an emergency fund for unexpected expenses. They are readily accessible and liquid, but you will want to be sure, so check the details. Besides an emergency account, these accounts help save for a down payment on a home, a car, or a vacation.
When surfing around for higher yields, you are bound to find higher rates, but with requirements. Higher minimum deposits or an ongoing amount in your account are common when you get higher yields. You may not want to tie up your money. If you don’t maintain some level, you may incur additional fees or other charges.Â
 Money Market Account ( MMA)
You can open a money market account (also called a money market deposit account)Â at a financial institution insured by FDIC. MMAs will offer slightly higher rates than savings accounts, typically require minimum deposits ranging from $500 to $2,500, may charge fees, and some offer check-writing privileges.
These accounts should not be confused with money market mutual funds, which are not insured. Instead, a money market fund is a mutual fund sponsored by an investment company rather than a bank that invests in money market securities.
Online banks offer higher rates than the national average, but you need to review the details of their offers.
Certificates of Deposit (CDs)
A certificate of deposit, or CD, is an interest-earning savings instrument purchased for a fixed period, such as three or six months, or one year, two years, or even five years. Some banks offer variable-rate CDs that pay interest that may adjust up or down periodically.
Like all money market securities, CDs are low risk but are subject to interest rate risk. For example, if you locked in a lower rate for a five-year CD, and interest rates are rising, you can’t move your money to another five-year CD with higher rates unless you have a CD that can be inflation-adjusted.
The rates range depending on duration one month CDs to 60 month CDs. The longer the duration the higher the rates which are around 4.9%The longer the timeframe to maturity, the higher the rate. Deposits can range from $100 to $100,000.
Historically High CD Rates
According to the Federal Reserve Bank of St. Louis, the historically highest CD rate was 18.65% in December 1980! Before you drool over those returns, be aware that the Fed was battling very high inflation of 12.5% and a 20% fed funds rate. The high-interest rates lasted for years and were not a picnic unless you had idle cash to buy CDs. CD rates, like other interest-bearing accounts, follow the rates set by the Fed.Â
One issue to be cautious about with CDs is that there may be penalties or fees for accessing the money you invested in these securities. These accounts may not be as accessible. You will be notified by the bank when the CDs mature, but if you aren’t prompt, they roll over to the next period. You can withdraw money from a CD before the end of the specified timeframe, but you will incur interest penalties. Short-term CDs (six to 12 months) pay rates of 4.10-4.20% APY, though some credit unions may offer higher rates.
Checking Accounts
A checking account is a deposit account held at a financial institution that allows the account holder to make withdrawals and deposits. You can write checks against deposits in this account.
Some checking accounts may pay interest; if so, they are negotiable orders of withdrawal (NOW) accounts. Checking accounts, called demand-deposit accounts, typically do not pay interest on deposits. Typically, banks pay relatively low interest on checking accounts compared to savings accounts.
Be Wary of “Free Checking Accounts”
When searching for a “free checking account,” make sure you know what the bank considers “free.” It probably means a non-interest-bearing account without maintenance fees or minimum requirement.
Fees We Pay
Banks charge a ton of fees. According to The Motley Fool, banks collected nearly $6 billion in overdraft and other bank fees in 2023. A Go Banking Rates survey found the average American pays $7 or more in banking fees per month. The survey revealed that 88% of the respondents were not planning to switch banks in 2019 even if they were charged unnecessary fees.Â
The most common bank fees and estimated costs are:
- Monthly maintenance fees (savings) of $1-10.
- Monthly service fees (checking), $3-20.
- Non-sufficient funds, $25-27.
- Overdraft protection, $34-36.
- Transfer from savings, $10-$12.50
 There are other fees people may incur, such as when keeping a low balance, stop-payment orders, excessive withdrawals, loss of their debit card, foreign transactions, paper statements, and inactivity on an account.
These charges can add up for the banks as income, but are painful for consumers. You can always try to get these fees waived if it is the first occurrence. Instead, try to do your part to manage your account well.
According to a Bankrate study, the average minimum balance needed to open a non-interest-bearing account is $156. However, the average minimum balance for an interest-earning account goes up significantly to $7,550.
High-Yielding Checking Account
FDIC-insured banks or NCUA-insured credit unions offer higher-yielding checking accounts. However, expect significantly higher minimums to open and maintain such accounts, and learn what fees you may have to pay to earn the high interest.