Savings Interest Rates Can Be Beaten If You’re Creative

by Mike

Where to Find Returns that Can Beat the Savings Interest Rate in a Low Interest World

This post comes from the NerdWallet.com team of personal finance bloggers and experts in helping consumers compare rewards credit cards.

A lot more Americans are turning away from traditional savings and CD accounts. The average savings interest rate for  2010 was pretty low – the best of the bunch being around 1.5% annually. Then the major banks were offering less than that, going below 1%. Even CD accounts dropped below the 1% rate.

Meanwhile you can earn 2% or more with a cash back credit card and earn a higher return on the money you spend than the money you save.  There’s definitely something wrong with that.

The Deal with Municipal Bonds

Since munis were paying higher yields and had non-taxable interest payments, a lot of investors turned to them. However, there is an ongoing debate about whether or not municipals are a safe option. Those that advocate it argue that due to the current economic state (recession) the state, city and county governments are using the funds for necessary income-generating building projects. Those that are skeptical about them say that the local governments won’t be fiscally responsible and will end up defaulting on their debt.

Investing in Utilities

Traditionally, stocks issued by utility companies were known to provide high dividend yields for those who didn’t care about the risks in equity. But still in all, many believe that utility stocks are a promising investment because they can expand over the years to come. For instance, they’re looking to offer and sell electricity in other countries that are developing, while renovating the power grids that are in America today. Utility companies are also looking to join in on the renewable energy, using new sources of energy like solar power. This is a mature industry that has about 5% dividend yields, plus the profit margins are being regulated in most states. Also, the earnings pretty much grow in lockstep with the amount of energy that is being consumed. If electric cars become a big thing, this too could cause utility companies to witness growth again.

Growing Popularity of P2P Lending

You can find that Lending Club and other borrower-lender networks are picking up in popularity. These private lenders and borrowers are able to pay higher interest rates than banks and you’ll understand why once you understand the way banks work. First off, banks make their money by borrowing at low interest rates and then loan out the money at high interest rates. Since private lenders are directly connected to borrowers, the bank is cut out of the equation, which then reduces the interest rate and lowers rates for borrowers, allowing lenders to have higher investment yields. Because of this, P2P has become a great option for borrowers who are looking to consolidate their debt. It is also a great option for lenders who want to avoid low-yielding accounts with banks.

Long-term CD Accounts

For those who don’t mind the commitment of longer investments, you can opt for long-term CDs. They have dropped their rates, but you can still earn a decent amount over a long enough period of time.  With a 5-year CD account, you can earn 3% (as of right now). Plus, with a CD account, you won’t have to worry about the risks that are associated with utility stocks and lending networks.

High Yielding Checking Accounts

There are various banks out there that have high-interest checking accounts. A lot of these “reward checking” accounts can be found at smaller local and online banks. Of course, with such accounts there are numerous conditions. For one, you will be required to keep a big balance in your account at all times and use your debit card at least 12 times during each billing period. Some will even require you to have direct deposit, use online bill pay and get statements via email instead of paper mail. By doing so, you will receive 4% interest on the first $25,000 that is in your bank account and 1% on any amounts in your account that are over $25,000. The downfall is that if you fail to meet the conditions, you will risk losing the high interest rate. Then there are some interest rates that are variable, so after a certain amount of time, it can drop down to 2%. You can find high interest rates for savings and checking accounts at credit unions as well. It may not differ much from banks, but you should check it out anyway.

Options Are Always Good

Everyone loves having options, and it’s a good thing that banks no longer have a monopoly on investment instruments. You can also find news around the Web that shows that investors are beginning to split up their surplus cash into various accounts. This allows them to see which offers the best benefits for the long haul.

The condition of the economy plays a part in what instruments and institutions have to offer. It’s best to keep your mind open as you invest because there are higher-earning opportunities all over.

{ 4 comments… read them below or add one }

JT McGee

Utility companies are excellent, as are oil producers. Chevron (CVX) has a great yield and they’re buying back shares! That’s a win-win for the value/income investor.
JT McGee´s last blog post ..Obama’s State of the Union Budget Cuts Visualized



The reason that credit card rewards are higher than savings account interest is that the banks want you to be in debt. They don’t want you to save. Banks make the bulk of their money off of the interest they charge on debt products. If they’re collecting an average of 15% in interest on outstanding balances, they can afford to pay a 2% rebate on purchases.

I guess comparing credit card rewards to the sub 1% savings accounts is valid if we’re not talking about money that is intended to be held (such as your EF). However, it ceases to be a good comparison as soon as you start looking at money you want to actually hold in an account somewhere. If you’re saving for a new car or a down payment on a home, the credit card rewards isn’t an apples to apples comparison with a savings account. The other options listed are. Those would just need to be evaluated in terms of your risk tolerance.


Buck Inspire

I looked into Propser.com, but never followed through. Might have to revisit this option to boost my savings. Will check out the Lending Club as well. Thanks! :)
Buck Inspire´s last blog post ..Entrepreneur Analysis


Jeff @ Sustainable Life Blog

Nice post. I havent tried using a p2p lending service, but I guess I’d be open to a little exposure on that front. One of the local credit unions offers 4% interest on checking accounts as long as there is a min bal (1k) and 10 debit card purchases per month. Great deal.


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