10 Ways to Earn Interest for Your Family's Benefit

Interest is an important way to steward your family finances. The more you grow money, the more resources are available to take care of your households needs. It’s also important to remember that inflation causes your family’s cash to be worth less over time. Earning interest can help offset this effect. 

What is Interest?

Interest is what you are paid when someone else uses your family's money. In the simplest example, you deposit money in a bank savings account. The bank then loans your money to another party and charges that other party interest. You are rewarded for allowing your money to be used by the bank for this purpose. The reward is paid to your family in the form of interest. The concept of interest has been around for a long time. Interest is referenced as a concept early in the old testament. It believed that parts of mathematics were invented in Babylon as a way to track interest payments and compound interest. 

Ways to Earn Interest for Your Family’s Benefit

We put together some easy ways to earn interest:

Savings Accounts

Just as it sounds, a savings account is a bank account specifically used for saving money. Because these accounts are designed to house money on a more medium or long-term basis, they typically offer a better interest rate than checking accounts. For many, a savings account is used to cover unexpected expenses such as a job loss or sudden home repair. In addition, savings accounts can be used to save for short-term goals, such as Christmas, upcoming vacations or house renovations.

To access the money in your savings account, you will typically use your online banking system or app. Savings accounts are not usually accessed through the use of checks or debit and ATM cards. Instead, it is common to link a savings account to a checking account, where these methods of withdrawal are easily used. In fact, Regulation D limits users from withdrawing money from their savings accounts to no more than six times per month. Attempting to withdrawal more than six times could result in penalty fees or account suspensions. 

Pros

• Easy to set up at the bank
• FDIC insured

Cons

•  Modest level of interest
• Limits on how often withdrawals can be made

"Then you ought to have invested my money with the bankers, and at my coming I should have received what was my own with interest." Matthew 25:27 ESV

High Yield Savings Accounts

A high-yield savings account is a type of bank savings account that almost always pays a higher level of interest than the average savings account. How much more interest can they pay compared to a traditional savings account? The interest rates are often between 10 to 25 times higher than many savings accounts at any given time.

You can choose to open a high-yield savings account at your current bank or credit union or seek out a different institution. Many online only banks offer competitive rates on these types of accounts to win business away from local banks. Like other accounts at your bank these savings accounts will have FDIC protections, but rates can also vary at any time. There may also be limitations on how many withdrawals you can make in a given period.

Pros

• Higher interest than a savings account with similar protection.

Cons

• Limited withdrawals per month and interest can vary.

Certificates of Deposit (CDs)

A certificate of deposit is a financial product offered by banks and credit unions. A CD is bought with a one-time lump sum amount and locked in for a set period of time. You can choose term that runs anywhere from a few months up to a few years. The interest rate when you buy the CD does not change until the CD matures (term ends). You can withdraw money before the term ends but expect a penalty.

Pros

• Offers a higher level of interest than a savings account

Cons

• Interest rate is locked in so if interest rates rise you won’t benefit
• Can not withdraw before term ends without penalty

Money Market Accounts

Money market accounts are offered at a bank or credit union. Money market accounts offer interest like a savings account with a few additional features in some cases. As an example, you could write checks off this account. You may also be able to get a debit card for this account type. For these privileges, expect a higher requirement for the initial and ongoing balance. You may also face a limit on the number of monthly withdrawals.

Pros

• Higher interest than a savings account
• Potential for other features like check writing or debit card

Cons

• Higher balance requirement
• Limited withdrawals

Money Market Funds

Money market funds are a type of mutual fund. Typically, you will buy and hold a money market mutual fund in an investment or brokerage type of account. These funds are very secure, but do not carry FDIC insurance like you have at a bank. These funds buy very secure investments from the US government, government entities, and companies with very good credit quality. Money can be withdrawn at any time from these funds.

Pros

• Offers higher interest than a savings account
• Money is not locked in for a set period of time

Cons

• Not FDIC insured
• Requires minimum investment

Health Savings Accounts (HSA)

Health Savings Accounts are accounts paired with a specific health insurance type. The idea is to put dollars into your HSA (with some tax benefits) and have the option later to withdraw money for family medical expenses. Your specific HSA provider will have different options but will almost always have an option that will earn interest. This may be in addition to other options such as mutual funds or other investments. How much you allocate to different options may differ depending on your time horizon and goals, but at a minimum it’s important for some money to earn interest in your HSA. One great feature is your HSA is tax advantaged. That means interest you earn is exempt from taxes so long as the HSA money is used for what the IRS calls “qualified medical expenses.”

Pros

• Interest earned is available for family medical expenses
• Interest is tax exempt if you meet IRS rules

Cons

• Interest earning options vary by provider
• Interest will generally be in line with a savings account
• Other investment options in the HSA may be more appropriate for your situation

Savings Bonds

Your grandmother might have told you about savings bonds, but they still exist. These instruments are paperless now and generally purchased at a website serviced by the US Treasury. The bond you buy will have a fixed interest rate. One unique benefit of savings bonds is how interest is treated for tax purposed. You’ll owe federal income tax, but will be exempt from state and local taxes.

Pros

• Low minimum
• Interest is exempt from state and local taxes

Cons

• Must hold for a minimum period to avoid a penalty
• Maximum on how much you can buy each year
• Interest rate is locked in so if interest rates rise you won’t benefit

Interest Bearing Checking Accounts

Interest bearing checking accounts are exactly what they sound like. The advent of online banks has brought some new financial products like the ability to have a checking account that earns a modest level of interest. These types of accounts will earn less interest than a savings account. You may also face a cap on the amount of interest you can earn. They may also have a higher minimum requirement for the privilege. Watch the minimum closely to avoid a monthly fee that could exceed the interest you earn.

Pros

• Interest with the flexibility of a checking account

Cons

• Higher minimums to avoid a fee
• Lower interest than a savings account

Treasury Bills

Treasury bills are short term financial instruments issued by the US Treasury. These can be bought directly from the US Treasury or through a bank or brokerage account. Treasury bills come different terms or ”maturities” with the shortest at 4 weeks. Interest is locked in when you buy the bill. Expect to hold the bill until maturity date. There is a way you can sell your Treasury Bill to another party, but this can result in fees, and you could sell the bill for less than you would like. Interest is exempt from state and local taxes.

Pros

• Interest is exempt from state and local taxes
• Minimum investment is low ($100)

Cons

• Interest rate is locked in so if interest rates rise you won’t benefit
• Requires selling your treasury bill in the open market to get access to your money before maturity

Short-Term Bonds

Short term bonds are a less common option families consider but can offer benefits in some cases. These financial instruments are bought in an investment or brokerage account. Issued by government agencies or business, these are short term instruments that earn interest. These bonds tend to carry higher minimums than other options. If you need access to your principal before the bonds mature, you’ll have to sell your bond to another party for a fee and face the potential you could sell for less than your principal. 

Pros

• Usually higher interest than some other options

Cons

• High minimums
• Does not carry a guarantee
• The only way to get your principal before maturity is by selling which could incur a loss
• Buying carries more complexity

The Marvelous Magic of How Compound Interest Works

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