If you’re someone who makes saving money a priority, then you may be wondering which interest-bearing accounts offer the highest earning potential. A traditional savings account will allow you to earn some interest, but there are better options available if you want to earn the highest possible dividends or interest rate on your balance.
Here at Addition Financial, we want our members to be able to maximize their savings and earnings, so they can pursue their most important financial goals. With that in mind, here are five interest-bearing accounts to consider if you want to boost your savings and save as much money as possible.
What is an interest-bearing account?
An interest-bearing account is any account at a credit union or bank where you may earn dividends or interest on your deposits. Credit union account holders are members, which is why earnings are paid in the form of dividends. Banks pay interest.
The most common procedure at both credit unions and banks is to compound interest or dividends daily and credit them to accounts on a monthly basis.
Interest-bearing accounts are most often savings accounts, but many financial institutions also provide the option of an interest-bearing checking account. The requirements for a checking account that pays interest or dividends may vary from a traditional checking account because they include a minimum balance requirement to earn interest.
As you might expect, there’s a lot of variation among financial institutions in terms of what accounts they provide and how much account holders may earn on their deposits.
5 Interest-bearing accounts to consider
If you’re in the market for one or more interest-bearing accounts, here are five account types to consider.
#1: Personal savings account
A personal savings account is the most common type of interest-bearing account. Most financial institutions offer at least one type of savings account. You can link your savings account to a checking account, making it easy to transfer funds as needed.
If you keep your savings in a personal savings account, you’ll have easy access to your money. Most personal savings accounts don’t have a minimum balance requirement to earn interest, although some may.
The biggest downside of keeping your money in a personal savings account is that you’re likely to earn very little return on your deposit. The average interest rate across all savings accounts as of 2023 is 0.43%, but you’ll need to keep in mind that number includes higher-interest accounts. To put that in perspective, if you had a $10,000 balance and a 0.25% interest rate, you would earn $25 per year in interest.
#2: Interest-bearing checking account
Many people prefer to keep money in a checking account to cover checks and debit card transactions. While it’s uncommon, some financial institutions offer interest-bearing checking accounts as an option for their customers.
It’s common for financial institutions to impose a minimum balance requirement to earn dividends or interest. For example, Addition Financial offers the Benefits Checking account, which pays dividends on balances over $1,000.
If you opt for an interest-bearing checking account, you can still earn a return on your money while keeping it accessible for regular use. There isn’t any need to transfer funds between accounts because they’ll be in your regular checking account.
#3: Money market account
A money market account is a type of high-yield savings account that comes with some benefits and restrictions. The dividend or interest rate on a money market account may be significantly higher than with a traditional savings account–in some cases, it may be up to 10 times as high.
If you decide to open a money market account, you’ll need to keep a few things in mind. It’s common for financial institutions to impose both a minimum deposit requirement and a minimum balance requirement to earn dividends. You won’t be able to open an account without the minimum deposit, and you won’t earn dividends or interest if your balance dips below the minimum.
The funds in a money market account are liquid but may be subject to certain restrictions. For example, our Addition Financial money market account has a maximum of six transactions per month using a debit card, check, ACH, overdraft protection, or by phone with one of our team members. However, you may make unlimited transfers and withdrawals using mobile or online banking or an ATM.
#4: High-yield savings account
High-yield savings accounts are typically provided by online lenders and pay higher interest rates than many money market accounts. However, the rates are variable.
The interest rate on a high-yield account may be 4% or higher. To see what a difference that can make, let’s look at the $10,000 balance we mentioned earlier, which would earn $25 per year with an interest rate of .25%. In a high-yield savings account, that same deposit would earn $440 with a 4.4% interest rate.
Like money market accounts, high-yield savings accounts may come with a limit on the number of withdrawals you can make and typically do not come with a debit card. You’ll need to weigh the higher yield against the restrictions to determine if a high-yield savings account is right for you.
#5: Certificate of deposit
A Certificate of Deposit, or CD, isn’t a savings account, but it is a type of account that offers generous interest rates or dividends. Unlike the other accounts we have mentioned, a CD requires a one-time deposit for a specified term, which may be as short as six months or as long as five years.
With a CD, there is a penalty if you withdraw your money before the term ends. Since the money you deposit isn’t liquid, there are some disadvantages. Getting a certificate of deposit may not be ideal if you want to make sure you can use your money.
At Addition Financial, we offer certificates with terms ranging from six months to five years. There is a $1,000 minimum deposit and a $1,000 minimum balance to earn dividends.
What features should you look for in an interest-bearing account?
The question you may be asking now is which interest-bearing account is right for your needs. Here are some of the features you should look for before you choose an account.
APY
The first consideration is the annual percentage yield or APY of the account you’re considering. There can be a lot of variation between accounts, so make sure to read the fine print. In most cases, dividend or interest will be compounded daily and credited to your account on a monthly basis.
Minimum deposit requirement
Some of the accounts we have mentioned here come with a minimum deposit requirement. You’ll want to make sure you understand how much money you need to deposit before choosing an account. The minimum deposit amount may be the same as the minimum balance requirement.
Minimum balance requirement
It’s common for high-yield savings accounts, including money market accounts, to come with a minimum balance requirement to pay dividends or interest. If your balance falls below the minimum, you won’t earn any money on your deposit. It’s important to keep that in mind before you put your money into any interest-bearing account.
Monthly fee
Many financial institutions charge a monthly fee for interest-bearing accounts. Some may waive the mothly service charge if you maintain a balance over a minimum amount. Whether you open an account at a traditional financial institution or choose an online savings account, you should read the fine print to make sure there are no hidden fees.
Withdrawal limits or penalties
Certain accounts, including CDs and money market accounts, may limit how many transactions you may have each month or when and how you may withdraw money. If you opt for a CD, you should expect an early withdrawal penalty. As a rule, it’s best not to choose a CD unless you’re confident you won’t need to touch the money until the certificate reaches maturity.
Other features
You may want to check out additional features. For example, some money market accounts include checking while others provide a debit card for easy withdrawals. The best way to decide is by comparing a full list of features, fees and interest rates for every account.
Can you lose money in a high-yield savings account?
The good news about most interest-bearing accounts is that the deposits in them are insured. Credit union accounts are insured by the NCUA up to $250,000 per member, while bank accounts are insured by the FDIC.
As long as you choose a financial institution that is insured by either the NCUA or the FDIC and your balance is less than $250,000, you won’t lose your money even if your bank or credit union fails. Addition Financial is insured by the NCUA.
Most financial institutions state on their website that they are FDIC or NCUA insured. However, we still recommend checking to make sure they are insured. You can use the NCUA’s credit union finder tool, here, or the FDIC’s BankFind suite, here, to research financial institutions.
Boost Your savings with help from Addition Financial
Opening an interest-bearing account can help you grow your savings and work toward your short-term and long-term financial goals. The five types of accounts we’ve listed here all provide a way to put your money to work. We recommend researching, talking to a financial advisor and comparing accounts before choosing the one that’s right for you.
Are you looking for an interest-bearing account to increase your savings? Addition Financial has an array of accounts that can provide what you need. Click here to read about our savings accounts and become a member today!
