If there’s one upside of a rising interest rate environment, it’s earning a higher return on that cash sitting in a savings account. The interest paid by savings accounts is added to your balance. However, even the best savings rates may fall shy of the inflation rate, so many people prefer investing their long-term savings.
Though the rates on savings accounts have remained low at many big banks, there have been significant rate increases at online and community banks over the past year or so. Central banks' rate hikes throughout 2022 and 2023 have translated to higher rates on top-yielding savings accounts.
Though inflation is slowing, high prices have taken a toll on consumers’ budgets, and getting a higher yield can better help you make up for those losses. It also means you can earn returns on money that would otherwise remain stagnant.
However, a high-yield savings account is not the only way to earn passive income. Here are some tips to help you get the best rate on your savings and some alternatives that, after an initial investment, start to generate income without regular work.
5 tips to help you get the best rate on your savings in February 2024
- Research current savings account rates
- Compare high-yield savings accounts online
- Avoid tiered interest rates
- Avoid teaser rates
- Consider switching banks
1. Research current savings account rates
The first step to getting the best annual percentage yield (APY) is to understand what’s considered competitive in the current interest rate environment. Compare rates at multiple brick-and-mortar banks, online banks, and credit unions. Online banks tend to pay higher rates than traditional banks.
While big banks typically don’t pay high rates, they can offer additional perks for loyalty rewards, such as for using other bank services or keeping a high balance across accounts at the bank.
Local credit unions are another option. These are not-for-profit, member-owned institutions that distribute their profits to their members. This may translate into higher savings rates.
2. Compare high-yield savings accounts online
Doing a more targeted search comparing high-yield savings accounts is an easy way to find the best annual percentage yields. Most of these accounts are from online banks (though not all of them), so make sure you’re comfortable banking online. Online banks are just as safe as regular banks.
When comparing accounts, look for features and associated fees. Much of the important information about the account can be found in fee schedules and disclosures. Some things to look out for include:
- Monthly maintenance fees
- Minimum balance requirements
- Transaction limits and penalties
- Automated savings features
- Options for transferring money in and out of the account
- Past account problems such as data breaches
If the bank has low or no fees and helpful tools, consider that in your evaluation. You may be willing to choose a bank with a slightly lower deposit rate if its tools and reduced costs help you save more money over time.
3. Avoid tiered interest rates
Some banks offer tiered interest rates to reward customers who maintain higher balances. Savings accounts may offer premium rates if you deposit at least 10,000 or 25,000 USD or EUR, for example.
However, you can find top-yielding accounts that pay the same yield across all balances. If you end up stashing all your money into a savings account to meet the balance requirement, you might miss out on other investment opportunities. In many cases, excess cash may be better off invested in the market with a higher target annual return rate. Plus, if you need to withdraw some of the cash in a tiered-rate savings account, your rate might drop.
4. Avoid teaser rates
The best available interest rates may be short-lived. Banks may offer teaser or promotional rates, which are attractive interest rates used to get new customers to open a savings account. Banks may significantly lower the teaser rate after just a few months.
You may also have to maintain a minimum balance and meet other requirements to get the high rate. Always check the fine print explaining the rate’s terms.
5. Consider switching banks
A Bankrate survey from 2022 found that, on average, US consumers have stuck with the same savings account for nearly 17 years. One of the top reasons cited was simply that “It’s the account I’ve always had.”
But if your current savings account is only offering average or below-average rates, it might be time to switch banks, especially in an environment where the best savings rates are a few times above the national average. Shop around for the best savings rates and investigate transferring your money into a new account if one appeals to you.
Savings Accounts vs. Passive Income Investments
High-yield saving accounts are one of the ways to earn passive income, a regular cash flow that requires little or no daily effort to maintain.
Passive income is not easy money — in fact, the opposite can be true. Most ways to generate passive income require an upfront investment of either money, time, or both; the income part comes later (in some cases, much later). But once you've made that initial investment, passive income can pay off for years to come.
You can earn passive income through investing in certain financial assets or by starting businesses that, after an initial investment, start to generate income without regular work. The taxes you'll pay on passive income may vary depending on the source of the money, so make sure you keep careful records of your earnings.
Investing your money is a great way to build long-term wealth because it can potentially yield higher returns than a savings account. Even the best savings rates may fall shy of the inflation rate, so many people prefer investing their long-term savings. However, doing so comes with higher risk.
Investing is a good option if you have long-term savings goals and are willing to take on some risk. Stocks, bonds, and funds are common types of investments. However, investments can lose value, whereas money in a savings account is typically insured. It’s essential to research and understand the risks involved with investing before spending your savings on stocks.
5 Alternatives to High-Yield Savings Accounts
- Dividend stocks
- Dividend index funds and exchange-traded funds
- Bonds and bond index funds
- Real estate investment trusts (REITs)
- Crypto staking
1. Dividend stocks
Purchasing stocks that give a portion of the company's earnings to investors (dividends), is one strategy to create an income stream. The best dividend stocks gradually raise their distribution, enabling you to increase your future income.
Dividend stocks have the added benefit of being less volatile than growth equities, which can help diversify and even stabilize your investment portfolio. Reinvesting dividends back into the stock is another option for investors, which may increase your investment if the stock performs well.
2. Dividend index funds and exchange-traded funds
Instead of selecting and purchasing specific stocks, you can invest in index funds or exchange-traded funds (ETFs) that hold dividend stocks. For individuals who want to invest passively but with less involvement, there is this option.
A well-rounded selection of numerous equities is held by index funds, which seek to replicate the performance of a particular index, such as the USA 500 or Dow Jones Index. An index fund or dividend ETF will invest in several dividend-paying equities. Since market fluctuations are typically less volatile across an index than they are for individual equities, index funds can aid in balancing portfolio risk.
Dividend ETFs mirror the simplicity of trading stocks while providing index funds' benefits for diversification.
If you don't already have one, you'll need to open an account with a broker like CAPEX.com to invest in stocks, index funds, ETFs, or other publicly traded assets.
With us you can invest in 5,000+ stocks and ETF, including dividend aristocrats and other high-yield dividend stocks.
3. Bonds and bond index funds
Bonds are a mechanism for investors to lend money to businesses as well as to the federal, state, and municipal governments while also earning interest, as opposed to purchasing a part in a firm through stock. Bonds are regarded as a less risky investment than stocks, although they often yield a lesser rate of return.
Due to their reduced volatility and relative safety compared to stocks, experts advise investing a portion of your portfolio in bonds. As you get closer to your investing objective (such as retirement), you should increase the proportion of bonds in your investment portfolio.
4. Real estate investment trusts (REITs)
If you want to build passive income from real estate without the fuss and bother (not to mention the hefty down payment) of buying and managing properties yourself, REITs may be the answer.
Like mutual funds, REITs are companies that own commercial real estate, such as office buildings, retail spaces, apartments, and hotels. REITs tend to pay high dividends, but they vary in complexity and availability. Some are publicly traded on stock exchanges; others are not.
New investors may want to stick to publicly traded REITs, which you can purchase through an online stockbroker like CAPEX.com. You can also diversify your real estate holdings by investing in mutual funds or ETFs that track multiple REITs.
5. Crypto staking
Crypto staking is a way of growing your holdings in certain cryptocurrencies by using them to help verify activity on an underlying blockchain network. When you stake a cryptocurrency, you can be rewarded with more cryptocurrency.
Staking, for most people, involves delegating your cryptocurrency to someone who is compiling records of transactions on the network on which it runs. Those verifiers need to put some tokens at stake to guard against fraudulent transmissions. By giving the voting power of your tokens to a reputable verifier, you can get a share of the rewards they receive for carrying out their job accurately.
But there is some risk: If the verifier you're working with is penalized, you may be as well. And staking sometimes requires you to commit your holdings for a set period, meaning you can't sell or trade them.
Several crypto trading platforms offer staking programs, though these arrangements have recently experienced regulatory scrutiny in the U.S. It's important to note that staking is not available on all cryptocurrencies — notably Bitcoin does not support staking.
If you’re saving for a short-term goal or need immediate access to your money, a savings account is your main choice. Compare online banks with larger banks when you search for a high-yield savings account. You’re likely to find that online banks have lower minimum balances, won’t have monthly fees, and may pay the same annual percentage yield on all balances. In many cases, this annual percentage yield will be higher than a savings account at a brick-and-mortar bank. Use the national average savings rate as your gauge. You should be able to easily find a bank that’s offering an annual percentage yield higher than the national average.
However, if you’re saving for a long-term goal, such as retirement—and you’re okay with some level of risk—investing can be a smart way to build wealth and potentially earn higher returns.
Before you start investing in stocks and other assets, you should consider using the educational resources we offer like CAPEX Academy or a demo trading account. CAPEX Academy has lots of free trading and investing courses for you to choose from, and they all tackle a different financial concept or process – like the basics of analyses – to help you to become a better trader or make more informed investment decisions.
Our demo account is a suitable place for you to learn more about leveraged trading, and you’ll be able to get an intimate understanding of how CFDs work – as well as what it’s like to trade with leverage – before risking real capital. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading.