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Contents
Interest-bearing accounts are one of the easiest ways to save and grow your money over time. By being mindful of the type of account and its terms and conditions, you can make sure your money is working hard for you while still maintaining access to it if needed.
With a little bit of research and planning, you can easily take advantage of an interest-bearing account and give your savings a boost.
Your money will earn different amounts of interest based on the type of account you choose.
Keep in mind that, like many other accounts, you will need to meet some extra requirements.
Read on to learn everything you need to know about bank accounts that pay interest, including the pros and cons you should think about.
So, what’s an interest-bearing account?
Interest-bearing accounts are one of the most popular methods of storing and growing money.
An interest-bearing account is an account that pays you a certain amount of money as a return on your investment. Interest is based on the amount of money you deposit into the account and the rate that your bank pays you, which can vary greatly depending on the type of account.
To open an interest-bearing account, you must first find a bank that has this type of account available and meet their requirements.
Most banks require a minimum deposit and maintain a monthly balance in order to qualify for interest earnings. In addition, some accounts may carry a monthly service fee, so be sure to read the bank’s disclosure carefully before signing up.
Once you have opened an interest-bearing account, you can begin to watch your money grow.
Generally speaking, the more money you have in the account and the longer it remains there, the more interest will be earned. Interest earned typically compounds on a monthly or quarterly basis, meaning that the longer the money is left in the account, the more it will be compounded and thus earn more interest.
Related: What are Savings Bonds?
What are the types of interest-bearing accounts?
Interest-bearing accounts include checking, savings, money market and CD accounts. Read below for more detail on each type of account.
Savings accounts that pay interest
The most basic type of account that earns interest is a savings account. You can open them in a few easy steps at banks, credit unions, and other places that provide banking services.
They are usually where you put money you want to save instead of spending. Savings accounts can be a good place to keep your emergency fund or IRA.
Some banks let you move money between your checking account and your savings account. But be careful, because this may cost you, especially if you are transferring money to avoid paying high overdraft fees.
Checking accounts that pay interest
The money you put into a regular checking account usually doesn’t earn any interest.
However, some banks offer checking accounts that earn interest. These accounts give you all the benefits of a checking account and also give you the chance to make a little money.
But because they offer interest, you often have to meet other requirements as well, like making a big opening deposit and maybe paying a monthly maintenance fee. Make sure you meet all of these requirements, and think about whether the money you make is worth the fee you’ll have to pay every month.
Typically, a regular checking account at your local big bank won’t earn a good rate. To make up for this, they do tend to offer welcome bonuses on accounts.
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Online high-yield savings accounts
Some savings accounts, known as high-yield savings accounts, give you a higher return on your investment (ROI), so you can earn more APY on the account.
Most of the time, online banks can offer you higher interest rates because they don’t have to pay high overhead costs to keep physical locations operating.
You can move money between your savings and checking accounts at online-only banks just like you can at traditional banks. Opening an account online is usually very easy. It comes with online banking, wire transfers, direct deposit, bill pay, mobile apps, and more.
But keep in mind that you won’t be able to talk to a bank teller in person if you need more help. If that’s a deal-breaker for you, you should stick with a regular bank.
If you’re willing to give that up and don’t mind being able to reach customer service online at any time, an online bank might be a good choice for you.
Read more: Find the best savings rates here.
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Money market accounts (MMAs)
Money market accounts are a good choice if you don’t mind putting in a large amount of money at first (like $5,000 or more).
When you open a money market account, you usually have to put down a larger amount of money up front. In exchange, you get higher interest than with a simple savings account.
MMAs are kind of like a mix between savings accounts and checking accounts. They offer most of the same benefits as a checking account, such as a linked debit card, cashier’s checks, and a limited number of ATM withdrawals per month.
Besides these benefits, your savings will also grow at the same time. Money market accounts could possibly pay more interest than regular savings accounts, but you have to keep a certain amount of money in the account at all times.
If you want easy access to your money or don’t have a lot saved up yet, you might want to look into other interest-bearing account options.
Certificates of Deposit (CDs)
Certificates of deposit (CDs) are a type of interest-bearing account that can be used for long-term plans to save money.
Certificates of deposit have a fixed rate of return, so there are no surprises. But you can’t get your money out until its term is over, or you may have to pay penalty fees.
You can choose how long you want your money to stay in the account. Most terms last between 1 and 5 years. The total interest rate you earn will be higher the longer the term, generally speaking. CDs are a great way to save for the long term when rates are higher.
If you think you’ll need to get your money out soon, you should probably choose a different type of account.
Also, the minimum deposit needed to open a CD can be anywhere from $200 to $10,000. This will depend on the type of CD and the rules of the bank.
Read more: See the best CD account rates here.
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High-yield checking accounts
Like savings accounts, some high-yield checking accounts have a higher annual percentage yield (APY) than others. Most of the time, these accounts are best for short-term savings goals.
But their interest rates tend to change, so you might not always get the high APY at the beginning.
Read more: See the best high-yield checking rates here.
The Pros and Cons of interest-bearing accounts
There are many good things about interest-bearing accounts, and they are a great way to grow your savings. However, you should also be aware of some possible bad things.
PROS:
- Money grows in interest-bearing accounts, which is the most obvious benefit. When you put money into an account that pays interest, the bank wants you to keep it there as long as you can. They give you a high APY as a reward for this. Why? Because while they have your money, they will use it to run their business, like lending it to other clients and making money from that.
- CD accounts may charge you a fee if you want to take your money out before the time is up. This way, you’ll be more likely to keep your money in the account, so you won’t be tempted to spend it and it will be easier to save up for what you want.
- There are a lot of choices when it comes to accounts that pay interest. You can have a checking account or an account for saving money. Some are better for long-term savings than others, and some add interest every day while others do it once a month.
- Depositors should always check to see if their bank is a member of the FDIC (Federal Deposit Insurance Corporation). If the deposit is FDIC-insured, you can be sure that your money is safe, even if the bank or credit union where you have it fails.
CONS:
- Some banks will charge you a maintenance or service fee every month to keep your account open. Make sure you know ahead of time about any fees the bank might charge you to avoid unpleasant surprises. Many banks that are only available online will waive the fees, but you should never assume anything. If you’re not sure, ask a bank rep or customer service.
- Most accounts that pay APY will require you to put a certain amount of money into your new account and keep a certain amount of money in it every month. If you don’t meet the minimums, some banks will charge you a fee every time you get a statement or close your account. Others might just stop giving you the interest rate you were hoping for.
- Interest-bearing accounts are usually used to save money instead of spending it on day-to-day things, so ATM fees aren’t much of an issue. So, the ones that let you choose between a debit card and an ATM will limit how much you can take out. If you go over the limit, you’ll have to pay a fee or a penalty.
- Most accounts that pay interest reward you for leaving your money in the account for longer periods of time. With some of them, you won’t be able to get your money out early (like CD accounts). That means you won’t be able to get to your money very easily.
Are interest-bearing accounts worth it?
Before choosing what kind of interest-bearing account to use, people should think about how soon they want to use the money.
It all comes down to what they plan to do with the money in the future. In other words, how soon do you need to spend this extra money?
In times like these, when you might be worried about a recession coming up soon, financial experts usually say that you should put an emergency savings fund at the top of your list.
A person should treat their emergency fund as if they might need the money tomorrow, since it is used for things that can’t be planned for. An online high-yield savings account is a great way for someone to keep an emergency fund.
With other types of savings accounts, like certificates of deposit (or CDs), your money may earn a higher annual percentage yield (APY) the longer you keep it in the account, but you usually have to pay a penalty fee if you take it out too soon.
Federal law says that you can take money out of a high-yield savings account or move it to another account up to six times per month without paying any fees.
A statement from the Federal Reserve Board says that this rule has been temporarily lifted because of the coronavirus outbreak. This means that customers can now make an unlimited number of convenient transfers and withdrawals from their savings deposits. This rule may change at their discretion.
Money market accounts, or MMAs, have the same limit of six withdrawals and work the same way as high-yield savings accounts, but they often have higher minimum balance requirements.
Frequently Asked Questions (FAQs)
How you answer this question depends a lot on your financial needs and goals. If you want your money to grow quickly and don’t mind making a bigger initial deposit and paying some fees, a high-yield account might be for you.
If you want an account for long-term savings and don’t need to get to your money quickly, a CD account may be a good choice to help your money grow over time.
A regular savings account would be the simplest type of account. But if you need the usual financial services that come with a checking account, choose a checking account that pays interest or a money market account (MMA).
An MMA is a savings account with extra features, like a debit or credit card and the ability to write checks.
It depends on what kind of savings account you have and how much interest you get on it.
For instance, if you put $1,000 in a savings account with a low annual percentage yield of 0.01%, you’ll only have $1000.10 after a year.
If you leave your money in the best CDs and money market accounts for a long time, you’ll earn more.
There are different ways to figure out how much interest you earn. The interest rate you earn will depend on the type of account you have and the bank where you opened it.
The interest rate on savings accounts is based on compound interest, which means that both the initial deposit and all the interest you’ve earned will be taken into account.
Most of the time, the APY (annual percentage yield) is used to figure out the interest. This is how much your account earns in a year, including interest on interest.
If your interest rate is fixed, multiply your account balance by the interest rate for the time you plan to leave the money in the account without taking it out.
On the other hand, if your account’s interest rate is variable, it will be harder to figure out because the interest can change over time. A lot will depend on your principal, the amount you put into the account at first, how long you want to let the money grow, and the annual percentage yield (APY) that your bank offers.
Also, keep in mind that some banks add interest on a monthly basis. On the other hand, some do it every day, and so on.
Bottom Line
An interest-bearing account is a great way to save money and use it as an investment.
There are many advantages to having an interest-bearing account. For one, it rewards you for saving money and investing in the future. The more money you deposit into the account, the more interest you will receive.
Online high-yield accounts offer better options than regular checking and savings accounts at traditional banks and allow investors to earn a higher rate of return with their funds.
Interest-bearing accounts are especially a good option during times of high interest rates, such as the current 2022 – 2023 time period.
Also, be aware that some savings accounts offer welcome bonuses as well. They may not compete with the best savings rates, but the bonus itself may make it worth your time.
Read more: Find the latest savings account bonus offers here.
Read more: See the best bank promotions here and the best investing promotions here.
