The best ways to earn the most interest on your savings

The best ways to earn the most interest on your savings

5 mins readLast updated February 17, 2023by Kate Morgan

Making your savings work hard for you is a must. Read on if you’re wondering how to earn interest on savings and maximize your financial potential.

In a time of increasing household costs, many US adults who are lucky enough to have savings are wondering how they can best utilize them to earn interest, increase their funds and maximize their monetary situation.

Here’s everything you need to know about earning interest on your savings, whether you’re working with small, regular sums or looking at things longer term.  

What’s the best way to earn interest on money you save?

Savings accounts serve many functions. They might be used to build up holiday savings, a college fund, or a deposit on a future home — the options are endless.

Primarily, many American families use a savings account to create a cushion. A safety net to catch them during moments of financial difficulty or unexpected expenditure.  

In the US, 56 per cent of people say they couldn’t cover an unexpected bill of $1,000 with their savings.

If you’d prefer to be firmly situated in the 44 per cent, saving money as soon as possible is crucial, and so is maximizing the interest you earn on the money you save. 

Figuring out the best way to save money and earn interest in your unique situation can help you grow your funds exponentially, especially if you have several years to play with as you attempt to accrue additional money.

Certain accounts can make the most of interest rates, and there are various options for both short-term and long-term savings goals.  

What about compound interest?

Before we dive into any recommendations, let’s briefly get to grips with compound interest.

This is a significant influencing factor in terms of your savings. When you can benefit from it, you can grow your money and increase your savings much more than you would otherwise (but you won’t always be able to benefit from it, as this sort of interest strategy won’t work for everyone).  

Compound interest is calculated by multiplying interest on the initial amount by interest already accrued.

For example, an amount of $10,000 in an account with an interest rate of five per cent would amount to $10,500 at the end of the first year. That’s calculated by multiplying $10,000 by 1.05.  

By the end of the second year, the account would have then earned further interest on top of the five per cent. The longer an account that gathers this kind of interest is open, the longer the periods of compounded interest will be.  

Because of this, a compound interest strategy, though incredibly effective, only works if you have longer-term savings goals. Frequent withdrawals will make it impossible for compounded interest to build up. 

To see how compound interest works a little more clearly, you may want to check out our compound interest calculator, which allows you to put in your own figures and expected return, to see how much your investments could be worth in the future.

The best accounts for earning interest

These days, most Americans have some kind of checking or savings account.

As of 2021, only 4.5 per cent of US households were without a bank account.

But as for determining the best place to save money and earn interest and the best bank account type for you?

That will depend on your aims and your finances. Different accounts have different advantages and disadvantages that you’ll need to be aware of.

Your options include: 

  • High-yield savings accounts Generally, high-yield savings accounts offer much higher interest rates than standard accounts.

    They have daily compounding interest, so the growth potential is enormous. They also have low monthly fees.

    On the flip side, they’re not always a great option for longer-term savings goals, like retirement

  • Interest-bearing checking accounts The annual percentage yield (or APY) in an interest-bearing checking account earns interest.

    This account type is famously flexible, with no limits on how often money can be withdrawn.

    Though this does mean that interest rates are usually very low for this account type, typically around 0.01 per cent 

  • Money market accounts These accounts are available through most banks, credit unions and online lenders.

    They’re an excellent option for those who wish to save cash but still be able to access it whenever necessary.

    The interest rate is competitive, meaning there’s plenty of room for growth, but substantial initial deposits are usually required 

  • Certificates of Deposit (CDs) CDs also enjoy a higher interest rate than standard savings accounts, have good compound interest rates and come with low monthly fees.

    Although they guarantee returns, those returns will likely be lower than if the money had been invested directly into the market.  

  • Stocks and shares ISAsWith a higher interest rate than cash ISAs, stocks and shares ISAs allow investment up to a certain level without the need to factor in tax.

    Leaving money to grow without touching it offers the best returns, but due to market volatility, these ISAs come with financial risk (and you’ll need to assess your risk tolerance before jumping in). 

Options for short-term savers

The best way to save money and earn interest will depend entirely on why you’re saving.

For example, opening a standard savings account is usually best for people aiming to accumulate smaller lump sums.

The money will gain interest without much risk, and the interest earned will depend on the bank’s rate. The current federal rate is between 4.25 per cent and 4.5 per cent

Traditional savings accounts are also likely the most appropriate option for the average American with mixed savings goals — some short term and some long term.

They are safe and stable but won’t necessarily grow your savings far beyond what you put in. 

Options for long-term savers

For longer-term savings plans, ISAs or specialty savings accounts are two of the best ways to earn interest.

They’re both particularly well-equipped to handle defined savings goals, such as a retirement fund or your child/children’s college fund. CD accounts (mentioned above) are another option, as they’re designed to house money that won’t be accessed immediately. 

Cash management accounts are a good choice if you’d like to invest more considerable lump sums for brokerage or retirement. These accounts usually offer higher interest rates than those available at regular banks.  

Stocks and shares ISAs can also provide high returns in the long term, having historically grown an average of ten per cent over longer periods, but the risk factor is mitigating.

As was also explored above, market dips and flows can impact your savings and cause stress. 

If you found this article useful, you might also find our article on hidden bank fees informative, too.

Content writer

Kate Morgan

Kate has written for leading publications and blue chip companies over the last 20 years.