Are you interested in having your money work for itself? If you’re like most people in this modern society, you are probably looking for ways to create a passive income and end the year with a little more savings than you started with. Interest is probably not going to give you enough money to become a main income stream or even a side hustle, but gaining more interest from your savings is just a smart way to tap into the money you’d otherwise miss out on.
The best way to earn interest in 2023 is by switching to higher-yield accounts. Regular bank accounts only give around 0.01%-0.07% APY, but high-yield accounts, bonds, and Certificate of Deposits often have much higher rates of APY. Online banks and Credit Unions also offer higher-yield accounts.
Everyone likes to know exactly where their money goes and how their investments are paying off. We can get a higher payoff from our money by doing a few simple things to gain more interest.
1. High-Yield Accounts
Savings accounts are a deceptively tricky concept. There are so many places one can go to open an account to hold their money. That’s exactly what many people see savings accounts as, a place to hold money. This is not entirely true. Savings accounts are not simply somewhere to store money that’s in a safer place than a piggy bank. Savings accounts are a place to earn interest.
When you put your money in a savings account, you essentially loan it to the bank. The bank repays you for this loan in interest.
Most people open a bank account at a nearby or national bank and use it as an avenue to organize and withdraw their money. This is especially prevalent among young adults and people who make lower wages. This is because people are wary of who they trust to handle their money (understandably), and they don’t have the ability to handle the financial repercussions of losing it. What many people don’t think about is the many reputable banking options that offer much higher returns on interest.
Typical bank accounts offer an APY (Annual Percentage Yield) of about 0.01% – 0.06%. That’s an extremely tiny number, unfortunately. Furthermore, most checking accounts receive no interest.
There are many online banks that offer saving accounts with APYs in the 0.5% range, which is much better. Online banks also tend to have fewer monthly fees in addition to higher yield. Discover Bank offers a 0.50% APY for online savings accounts. Sallie Mae even offers an online account that has an APY of 0.40% – 0.70%.
The crazy thing about checking accounts that can earn interest is that they often offer a higher APY than even high-yield savings. You can get a checking account through Consumers Credit Union with a minimum APY of 2.09%. There are a few strings attached, but this is still an amazing interest rate that’s hard to pass up. Other companies tend to offer around 0.60% on checking accounts, which is still better than the $0 you’re currently making.
Is there risk involved with high-yield accounts? These accounts have zero risk, so you can rest easy. As stated above, there are sometimes minimum balances or withdrawal limits, but these are typical, even with low APY bank accounts.
High-yield savings accounts are the most liquid option and are therefore the best option for those who may need their money relatively quickly. But what do we mean by “liquid”?
The term liquidity in investing, refers to your ability to use your money. The more liquid an investment is, the easier it is for you to access your money.
2. Savings Bonds
Are you a patient person and enjoy long-term solutions? If so, savings bonds might be a good option for you. A savings bond is a type of debt security given by the Department of Treasury to help pay for the borrowing needs of the federal government. This means it is one of the safest investments because it is backed by the federal government instead of a private company which has a greater risk of failing.
Savings bonds are long-term interest earners and can span out to 30 years of accruing interest. With a savings bond, you can pay anywhere from $25 to several tens of thousands.
While it is best to keep a savings bond untouched for as long as you can, if you decide to take out the money before the 5-year mark, you will forfeit the last 3 months of interest you received. After the 5-year mark, you will receive all your interest when you withdraw.
The nice thing about savings bonds is that you don’t pay state or local taxes on them. Additionally, you don’t have to pay federal taxes on them until you withdraw or close the account. You can avoid having to pay any taxes on savings bonds at all by using them to fund high education. Of course, this will add several stipulations.
Since savings bonds aren’t very liquid, they aren’t the right choice for short-term investments. However, savings bonds are an excellent way to set money aside for big-ticket items such as college or retirement down the road. Not only will your money double in value, but you won’t be able to spend it while it accrues interest. This is an excellent choice for people who struggle to keep money in their savings accounts due to reckless spending.
We’ve discussed this topic further in this article.
3. Certificate of Deposits
A CD (Certificate of Deposit) is a type of deposit-account backed by a bank (usually) where you deposit a fixed amount of money for a fixed amount of time. CDs offer higher-yield interest and have insurance up to $250,000.
Certificate of Deposits sound great and are quite low-risk, but they aren’t no-risk. For example, if you redeem your CD before it matures, you will face a penalty and will have to pay a fee. You also risk not being able to claim your money if you wait too long to cash in your CD. The bank may hold it for another period.
Another aspect of CDs that may pose some risk is the type of interest rate. Some Certificate of Deposits use a fixed interest rate. However, other CDs have a variable interest rate. While a fixed interest rate stays the same for the entirety of the term, a variable one changes with the market interest rates. In other words, if the market interest rates drop, your account may not earn as much interest as planned.
That said, you can’t lose money with a Certificate of Deposit, therefore, they are a very low-risk investment. Certificate of Deposits are an excellent choice for all investors due to the fact that they can be invested in for different periods of time. If you want to earn interest fast, but need your money by the end of the year, a CD is a good choice. However, if you don’t need the money for several years, there is a Certificate of Deposit that will match your time frame.
4. Credit Unions
A lot of people are not aware of all the features that credit unions offer. Many credit unions offer savings accounts, checking accounts, Certificate of Deposits, credit cards, loans, etc. They are a one-stop-shop for finances in a way. All of the accounts offered by credit unions have higher yield interest than those offered at banks.
How do they do this? Credit Unions are owned by the clients. Since there isn’t a CEO who needs a big paycheck, that money gets returned to you in the form of interest.
Credit Unions offer the same convenience as an in-person bank with higher rewards. Like most savings accounts, be prepared for credit unions to have a minimum monthly balance to gain interest. Read all the terms before signing up for anything.
Before you join a Credit Union, there are a few things you should be aware of. Many interest rates are variable and will fluctuate over time, even for high-yield savings accounts. These are still a better option than average accounts because even though the interest might fluctuate, it usually will not go as low as the regular accounts.
When joining a Credit Union, you will be required to pay a small membership fee. Some Credit Unions may even charge you this membership annually. Regardless, the higher interest rate will pay back your membership fee and more.
Another thing to keep in mind is that many high-yield accounts have maximum amounts that will accrue interest. Oftentimes, this maximum amount is $10,000. Many people have more than $10,000 in their savings account, so what should they do? These people should invest their money in multiple accounts. When one account reaches its maximum balance, start storing any other money you earn in another account.
Of course, you could always open an account meant for larger storage, such as a Money Market Account. Another option when you fill your savings accounts is to start investing in stocks. Stocks are riskier than other investments but can bring some big rewards.
5. IRAs and 401ks
An IRA is an Individual Retirement Account. There are traditional IRAs and Roth IRAs. It’s important to distinguish the difference between an IRA and a 401k. Many people with stable jobs have a 401k through their employer that states that the employer will match a certain amount in the account for their retirement. A 401k is exclusively through your employer; meanwhile, an IRA is owned by the individual.
The main difference between a traditional IRA and a Roth IRA is the way they are taxed. A traditional IRA is tax-deductible on both state and federal taxes. Because of this, withdrawals are considered distributions and will be taxed at your usual income tax rate when you withdraw them.
A Roth IRA doesn’t give you a tax deduction when you deposit funds. When you cash in during your retirement, your withdrawals are tax-free. Perhaps this is what is so appealing to people about Roth IRAs. With traditional IRAs, you have to take required minimum withdrawals during retirement; however, a Roth IRA does not have a minimum withdrawal requirement.
Roth IRAs have income limits, so if you are above a certain income (depending on if you are single or married, this changes), you may not be eligible. This income is pretty high, though.
What does this have to do with gaining interest? Retirement accounts earn compound interest. This allows your earnings to grow exponentially, which is better than a consistent fixed rate. The amount in your retirement accounts often adds up significantly over the years, and with 401Ks you could have an employer match your contributions.
Not to mention the great tax benefits from retirement accounts that save you lots of money in the long run. This is a very good long-term solution and is great for anyone who wants to have an easier time when they grow old.
There are so many ways to gain money from interest. Some ways are going to lead to a higher pay-off than others. There are definitely more risky ways to earn interest that will result in more money, but they’re often taxed more. The points listed in this article are all no-risk or low-risk ways to gain money from interest that are going to multiply your typical earnings from interest.
It’s important to look into tax details for each of these options. If you are a student or are intending on using accounts for higher education, you can get different benefits offered only to students. These may include higher interest rates or lower minimum deposits.
All-in-all, earning more interest in 2023 is pretty easy, depending on the route you decide. If you use each of these interest-gaining methods, your income could significantly increase by the end of the year. Best of luck, and happy investing!