Strategy for Getting the Best Yields in Deposit Accounts

This record low interest rate environment is making it very difficult for those who depend on interest income from their bank accounts. Many savers are probably trying to find what to do with their matured CDs which had been earning over 5.00%. Now it's very hard to find a 3.00% APY. I thought it would be useful to describe some strategies that may help you make a little more interest in this environment.

The first decision you'll need to make is if you want a liquid account or a certificate of deposit. In this post I'll focus on liquid accounts. The next post will focus on CDs (see post).

A liquid account like a savings account or checking account has the advantage of not locking in your money. There's no penalty if you need the money either for an expense or a better bank deal. Also, the rates are variable which is a plus if interest rates start to rise. However, in the last two years this variable interest rate feature has been a disadvantage as rates have fallen.

Liquid accounts can be tempting when many have yields higher than 1-year CDs. However, it should be noted that rate leaders rarely stay on top for more than a year. If you want the top rates, you need to plan to move your money to new banks or credit unions at least once a year.

The best rates on liquid accounts are typically only available online. If you only want to bank at brick-and-mortar offices, the yields that you find will likely be much lower.

Another issue to consider is that the liquid accounts with the best rates typically have balance caps. You only earn the top rate up to that balance cap. This cap can range from $10K to $250K. In the past it used to be the best rates were for those with the largest balances. For many liquid accounts today, it's the other way around.

For liquid accounts, there are two basic accounts to consider for maximum interest rates: 1) Savings Accounts 2) Reward Checking Accounts.

Savings Accounts

With a savings account, your money earns interest without any work. I consider money market accounts to be essentially the same as savings accounts. The main difference between these is that money market accounts typically have limited check writing. I'm also going to include a regular checking account in this group. There are now some internet checking accounts that offer rates just as high as online savings accounts. The main difference between checking accounts and savings accounts is that checking accounts don't have withdrawal limitations. Savings accounts and money market accounts are limited to six electronic or check withdrawals per month per federal regulation. The main feature shared by all of these liquid accounts is that they don't require any work to qualify for the high rates. Perhaps a better name would be work-free liquid accounts.

High-Yield Reward Checking Accounts

The other type of liquid account is the high-yield reward checking account. These accounts have higher yields than internet savings accounts, but there are two main disadvantages: 1) Balances that qualify for the high yield are capped, typically at $25K, 2) Monthly requirements like making 10 debit card purchases a month are required to qualify for the high yield.

Some banks that offer reward checking accounts also offer a companion savings account. The savings account also offers a high interest rate. Like the checking account, the high rate is typically limited to a certain balance. Also, you have to qualify for the high rate by meeting the reward checking requirements. Thus, I consider the reward checking/savings combo to be just a version of the reward checking account.

The debit card usage requirement is the main feature that allows these reward checking accounts to pay higher rates than savings accounts. For every debit card purchase, the retailer pays a small fee to the banks. This is called the interchange fee, and it averages around 1.40% of the purchase. There's concern that the Fed's proposed regulation on interchange fees will end these reward programs. It's too early to know what the actual effect will be, but it's something to consider. Rates could be considerably lower in the next few years.

Comparing Yields on Savings, Money Market and Checking Accounts

If you want to find the best rate regardless of the type of account, you can use our Deposit Account Comparison Tool. In the top right box, you can select the type of accounts you want to search for and the dollar amount for your investment. The dollar amount is useful to factor in balance caps. The larger your balance, the more effect the balance cap will have.

What's Your Strategy?

How do you maximize the interest in your liquid accounts? When do you decide to move your money to another bank? Has reward checking replaced online savings accounts for most of your money that you want to stay liquid?