Money & Policy

Where to Earn More on Your Savings

If you're fed up with puny rates at the bank, consider these alternative places to put your cash

Getting sick of how little interest your bank is paying on your savings?
You probably are, especially if you depend on your savings account or CD to generate income. When you think about it, your bank account is actually losing value, given that the roughly 3 percent rate of inflation is higher than what you're earning. With interest rates at the lowest they’ve been in decades (the average rate for money market accounts is a puny 0.14 percent), it’s a good time to look into safe alternatives that could pay you more — in some cases, above 3 percent.
Below are the best — and safest — options (you can research the mutual funds mentioned in this article by going to Morningstar.com):
Government-Backed Alternatives
Money-market accounts and CDs from online banks: You may be surprised to learn that federally insured online banks now pay as much as six times the national average on money-market accounts (0.91 percent vs. the 0.14 percent average) and more than three times the national average on one-year CDs (1.15 percent vs. the .34 percent average). If you’re willing to lock up some savings for five years, you can earn as much as 1.8 percent with an online bank. As a rule, the longer the CD, the higher its rate.
Each bank has its own early-withdrawal penalty rules for cashing in CDs before they mature, so be sure you know the policy before buying a CD. Even with the penalty, however, you might still come out ahead if you cash in a five-year CD early rather than keeping your money in a lower-yielding, penalty-free money-market account. Check out Bankrate.com for the nation’s top-yielding online money-market accounts and CDs.
Variable-rate CDs: Some banks and brokerages offer so-called performance-based CDs, which are linked to stock or bond indexes. This means that, instead of earning a fixed rate, your CD will have an adjustable rate that's in step with either prevailing interest rates or the stock market. Over the past year, a typical three-year, S&P-indexed CD (whose rate was tied to the Standard & Poor’s 500 stock index) yielded about 4 percent.
What if the market drops? This type of CD is also insured by FDIC, so you’re guaranteed not to lose your original deposit if you hold it to maturity. Here’s the caveat: If you withdraw money before the CD matures, you’ll be hit with a penalty and could take a loss. Each bank and brokerage has its own withdrawal rules, so read the fine print on a variable-rate CD carefully before buying one.  
Inflation-linked Series I U.S. Savings Bonds: The Series I U.S. Savings Bonds (sold online by the Treasury Department in denominations from $50 to $5,000) are worth considering if you’re willing to lock up your money for one year, the minimum you have to wait before you can redeem them. These bonds will definitely keep you at least on pace with inflation, because they pay a combination of a fixed interest rate and a variable inflation rate. You can hold the bonds for as long as 30 years, but will lose three months’ interest if you cash them in within five years.
Interest rates are so low now that the fixed rate on I bonds is currently zero percent, which means the bonds are paying the inflation rate: 3.06 percent. The Treasury Department sets I bond rates every six months; the next time will be May 1. For more about U.S. Savings Bonds, read the NextAvenue.org article The New Rules for Buying and Giving U.S. Savings Bonds.
Short- and intermediate-term Treasury and GNMA mutual funds and exchange-traded funds (ETFs): These funds and ETFs buy a mix of government securities, either Treasury bills, notes and bonds or pools of government-insured mortgages from Ginnie Mae. Treasury funds and ETFs currently yield under 1 percent; GNMA funds are yielding about 3 percent.
Bond funds are not entirely risk-free. When interest rates go up, the value of these funds go down. You’ll minimize risk by sticking with Treasury and GNMA funds with an average maturity (the average number of years before the funds' bonds mature) of less than five years.
Short-term, tax-free municipal bond funds: These funds, which hold bonds issued by states and municipalities, currently yield about 2 percent. That may not sound like much, but remember: The interest is free of federal income taxes. For someone in the 28 percent tax bracket or higher — the most suitable kind of person for this type of fund — that 2 percent tax-free return is the equivalent of earning a taxable rate of 3.5 percent. Just keep in mind that, like other bond funds, there's the added risk that the value of these funds could fall if interest rates rise.
Savings Alternatives Not Backed by the Government
Short- and intermediate-term corporate bond funds and ETFs: These funds and ETFs hold portfolios of debt issued by American corporations, and they're enormously popular now. That's because they currently yield 3 percent to 5 percent. But they are riskier than short- and intermediate-term Treasury and GNMA funds and ETFs because the corporate bonds aren’t backed by the government.
Dividend-paying stock funds and ETFs: These funds (sometimes called equity-income funds) and ETFs are another popular choice. Dividends accounted for two-thirds of the total return on stocks over the past several decades, and these funds and ETFs now offer total returns exceeding 5 percent. But don't forget: If the stock market dives, your dividend-paying fund or ETF will lose value too.

At Morningstar, you’ll find these funds in the Large Value category of stock funds. You can find a directory of dividend-paying ETFs at ETFMarketpro.com.

Pam Krueger
By Pam Krueger
Pam Krueger is the creator and co-host of MoneyTrack, the award-winning PBS TV series on personal finance investing. A former stockbroker, Pam has just launched Wealthramp.com,  an online tool helping consumers find and connect with vetted, qualified financial advisers.

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