How to Make Money on Your Money

If you’re holding more cash than you need, consider these interest-bearing account options recommended by this Certified Financial Planner.

Written by Mike Powers CFP® / October 7, 2022

Quick Bites

  • Your cash loses value if it's under your mattress or in a basic bank account.
  • If you have spare cash beyond what you need for your typical budget, rainy day savings, consider socking away the spare change in different interest-bearing accounts.
  • Your choice for savings vehicle could depend on whether you might want to access the funds in the short-term and how much tolerance you have for risk.

“Cash is king,” as they say. It’s great to have in an emergency, doesn’t fluctuate with the market and can provide a sense of security during times of economic turmoil.

But cash has one big problem: Over time, it becomes less valuable due to inflation through the loss of purchasing power.

I remember when I first learned to drive over 20 years ago, a gallon of gas cost less than a dollar. Right now, the best deal I can find in my area is about $3.25, which is down substantially from the $5 per gallon price tag earlier this year.

And it’s not just gasoline. We’ve all heard and experienced the realities of higher grocery prices, medical bills and skyrocketing college tuition. If you keep your cash in a checking or savings account earning 0.01%, the money is quickly becoming less valuable as costs rise.

But aren’t all banks paying very little interest? In a word: No. And especially not now as interest rates have been increasing throughout 2022.

Before worrying about where to get the highest rate, you should first ask yourself:

  • What is the purpose of holding this cash?

  • Do I have more than I need?

If you have more cash than you need, you may want to consider investing it toward your long-term financial goals and objectives. But if there is a good reason to hold it and you have an appropriate amount for your own personal financial situation, below are some options.

No-penalty CDs

A no-penalty certificate of deposit (CD) is a great option for cash you don’t plan to use on a regular basis and want to have parked for emergencies or some other upcoming short-term goal. You can lock in a competitive interest rate for a fixed period of time (typically somewhere between 11 and 36 months, although it varies by bank) and unlike traditional CDs, there is no penalty for an early withdrawal.

Although you may earn a slightly lower interest rate than traditional CDs, it is really nice to not have to worry about any early withdrawal penalties should you need the funds sooner than expected. Because as we all know, life happens.

A strategy I like to use personally is to purchase multiple no-penalty CDs. That way if I happen to need to use my emergency fund at a time when interest rates have declined, I can cash out only one of the CDs and leave the remaining ones earning a higher rate.

Best offer: 3.3% APY for 14 months

This and the rates mentioned below are the best as of Oct. 6, 2022. Better options may now be available.

Traditional CDs

As mentioned above, traditional CDs usually offer slightly higher interest rates than their no-penalty cousins because your money is locked up for a specific time period, with a penalty if you need it sooner. Traditional CDs may require a minimum investment to obtain the advertised rate.

Best offer: 4% APY for 13 months

When Should You Get a CD?

When Should You Get a CD?

A certificate of deposit can be a great savings option if its interest rate is higher than what other accounts pay, but a CD isn’t always the right place for your cash.

Find out more

Brokered CDs

As an alternative to no-penalty and traditional CDs, there are also CDs available on the secondary market through traditional brokerage accounts. These can be purchased or sold through your brokerage company and the yield varies based on the maturity date.

When using brokered CDs, be sure to watch out for any transaction fees to purchase or sell them. Also, know that they may lose value if interest rates rise and you need to sell them before the stated maturity date. So while they don’t have any early withdrawal penalties, they still have some interest-rate risk.

Best offer: 4.1% APY for 12 months

Money market mutual funds

Within brokerage accounts, there are usually options to purchase money market mutual funds. While the options vary widely based on the custodian and the amount of cash you are looking to invest, they can be an easy way to park cash temporarily.

When utilizing these funds, be careful of trading expenses and the underlying expense ratio for the fund, although just because a fund has a lower expense ratio doesn’t necessarily mean it will have the highest yield. These funds would not be eligible for FDIC insurance and could technically lose money, although it is very unlikely.

Best offer: 2.8% APY with no minimum initial investment

I Bonds

I’ve written about I Bonds in the past. While the annual purchase limits are low ($10,000 per entity, which can be a person, trust or business) and there is an early withdrawal penalty if cashed in during the first five years, they are currently offering a great rate if you are comfortable not having access to your funds for at least 12 months after purchase.

Current rate: 9.62% APY for the first 6 months if purchased before October 31, 2022. The rate was slated to reset on November 1 based on inflation over the previous six months, as it does on a semi-annual basis.

How Do I Bonds Work?

How Do I Bonds Work?

I bonds are inflation-linked investments issued by the U.S. government. Here’s what to know about making them a part of your investments.

Find out more

U.S. treasuries

While U.S. treasuries are not the same as cash, short-term treasuries can act as a good substitute given their high quality. When purchasing treasuries, one thing to remember is that their value will fluctuate until they mature. If interest rates increase, the value of any treasuries you hold will temporarily decrease. And the opposite is also true. So if you end up needing access to your funds before the maturity date, be prepared to accept less than you originally paid if interest rates have risen.

One additional benefit treasuries have is that they’re not subject to state or local income taxes. Not a big deal if you live in no- or low-tax state like Texas, but it could make a difference if you live in a state like California and are already in a high-income tax bracket.

Current rate: 4.3% APY for 12 months

Online savings, money market accounts

Online savings and money market accounts are pretty self-explanatory. While they mostly originated from banks that had no (or very little) brick-and-mortar presence, there are some smaller traditional banks that have increased interest rate offerings in order to get a share of the online banking market.

While these instruments used to have a limit of six withdrawals per month, this limit was lifted during the COVID-19 pandemic, so the accounts offer more flexibility than they did in the past.

Best offer: 3.25% APY

Best Online Banks of 2022

Best Online Banks of 2022

We reviewed the most popular direct banking options to find the best online checking and saving accounts for you.

Find out more

Promotional savings accounts

There are some banks that advertise “teaser” rates to help attract new customers. These typically will be a very competitive rate on certain account balances. Often these promotions will also be coupled with a requirement for direct deposit and/or using their credit or debit card a certain number of times per month.

For example, you might be able to get a 5% or 6% APY on the first $2,000, and then the interest rate would drop down to 0.5%. If you have a large amount of cash, this may not be worth your time and energy to open an account and track.

Reset

When considering any of these options, one thing to consider is FDIC insurance. This provides federal protection against bank failure or theft up to $250,000 per account holder, per bank. For more information on how to increase your coverage, visit the FDIC’s FAQ page. I Bonds and U.S. treasuries would not be eligible for FDIC insurance, but as long as the U.S. government doesn’t default on its debt, you should still be fine. Money market mutual funds would also not be eligible.

This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this article will come to pass. Investing in the stock market involves gains and losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security.

About the Author

Mike Powers

Mike Powers CFP®

Mike Powers is a Certified Public Accountant (CPA), Personal Financial Specialist (PFS), and CERTIFIED FINANCIAL PLANNER ™ (CFP®) who founded his own financial planning firm, Manuka Financial, focusing on helping clients retire before the traditional retirement age of 65.

Full bio

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