How many people are looking to get more interest on their bank money? Most likely everyone.
Due to COVID-19, the economy has taken a massive hit and the Federal Reserve decreased its interest rates from 1.75% to just 0.25%.
Because of this, finding better interest rates for your bank money has become more challenging than ever.
Unfortunately, very few people end up actually doing something about the interest on their bank money. Some of them simply complain about low interest rates, while others decide to wait for the rates to get better.
We know people who’ve been waiting for rates to get better since 2008! Who knows how many more years they’ll need to wait?
We think you’re better off thinking outside of the box to come up with creative ways to search for better interest rates.
If you’re unable to do that on your own, don’t worry. We’ve compiled a list of strategies that you can implement to get more out of your bank money – all of which we’ll discuss in this blog.
At the end of the blog, we’ll also lay out a 4-step process to guide you in your search for higher interest rates.
Read on to learn 6 simple ways of earning more interest on your bank money!
1. Pay Down Your Debt
The first thing you can do is pay down your debt as much as possible. This will allow you to get rid of the high interest payments that you make on car loans, mortgages, or even student loans.
How does this help your effective interest rate?
Consider this: If you’re paying 5% as interest on your existing debt, then clearing that debt is just like increasing your existing interest income by 5%!
In fact, it’s even better when you factor in the tax benefits. When you earn interest, you get a 1099 form and have to pay taxes on that interest. On the other hand, if you pay down your debt, you don’t get a 1099 for paying off your interest.
In a way, paying off 3% debt is actually better than earning 3% interest. A lot of people fail to recognize this.
2. Consider Delaying Your Pension and/or Social Security
If you’re approaching retirement soon, you might be thinking, “When do I file for my pension and Social Security?”
When you delay your Social Security (you can also defer it once you reach your full retirement age), it continues to grow at nearly 8% per year. Compared to a next-to-zero interest rate in your checking account, this is undoubtedly a better return.
If you need to make a withdrawal, what money do you spend first? The one that is growing at 8% per year through Social Security or the one in your checking account earning a little over 0% interest?
The one in your checking account, of course!
One of our clients recently inherited about $25,000. They came to us seeking advice on how to invest the inherited money. At that time, their Social Security was $2,000 per month.
We asked them to defer their Social Security, and instead, use the inherited money to cover their monthly expenses. After one year, their Social Security grew by 8% to nearly $2,160 per month!
3. Pay Your Taxes Early
Once you hit retirement, you might become subject to quarterly estimated taxes. A lot of people hate paying them. But do you know what’s worse? Paying an interest and penalty at the end of the year!
You’re better off getting that money delivered to the government in a timely manner if you want to avoid any interest or penalty. Better safe than sorry - don’t wait until April of next year to see how it shakes out. If you’re subject to estimated tax payments make sure to send them throughout this year.
Another important thing to consider is your traditional IRA. The tax rates for these accounts are expected to increase by 2026, making now the perfect time to reap the benefits of lower tax rates by considering converting your traditional money over to a Roth IRA and using your bank money to pay the taxes.
4. Find Existing Accounts With Better Interest Rates
Some people might not even need to go out and search for accounts with better interest rates. They might already have one.
Whole life insurances, non-IRA annuities, stable value accounts inside the 401(k) – a lot of these accounts might already have a great interest rate locked in.
It’s worthwhile to first take a look at what you already have. We do that all the time with our clients so that they can make the most out of their existing accounts.
5. Shop for Better Interest
If you shop around, you’ll find that there are some credit unions and local community banks that offer better interest rates compared to the bigger banks.
You can also opt for some online services such as:
It tracks real-time interest rates of several banks and helps you identify the bank offering the highest interest rate at any particular moment. It’s not a bank itself, but a great tool that makes interest rate comparison extremely easy.
A lot of people hesitate to work with online banks. Remember, these banks are also FDIC insured and essentially operate just like a physical bank in most ways.
This is another great service that you can use to manage your excess cash. It even goes one step beyond and does the interest rate shopping for you!
For a nominal fee of 0.08% per year, they find banks that pay much higher interest than the local banks or sometimes even those found through bankrate.com.
The best thing about this service is that it keeps looking for better interest rates on a regular basis. You don’t need to worry about banks changing their rates. If one bank decreases its interest rates, it’ll switch over to a new bank offering the highest interest.
They also have a minimum fee of $12 per quarter for savings accounts with balances less than $60,000. But – if you register through a financial advisor, they waive it off for you! If you wish to open an account on MaxMyInterest, feel free to reach out to us and we can get it set up for you.
6. Consider a Fixed Annuity
When it comes to deposits with more than 2 years of maturity, fixed annuities are a great tool for locking in higher interest rates.
Scott White, a fixed annuity specialist with CPS Insurance Services, likes to refer to fixed annuities as a “tax-deferred CD.” Obviously an annuity is not a bank CD, but it helps to start with what you know and then learn the differences. In a way, the money invested in fixed annuities experiences what Scott calls “triple compounding.”
For instance, if you have an annuity with $100,000 deposited at 2% interest, you’ll earn a regular interest of $2,000. Additionally, you’ll earn interest on your interest (compound interest.) And finally, as your taxes are deferred, you will also earn interest on money you would’ve spent on taxes each year.
One of the biggest differences between a CD and a fixed annuity is their liquidity. You can withdraw money from a CD before the maturity, and you’ll only lose some interest. However, liquidating annuities early can be subject to larger charges.
Moreover, annuities are not FDIC insured like the CDs, although they do have a similar protection known as a state guarantee fund. It guarantees a certain amount in your annuity, but the limit is different for every state.
To better understand how an annuity works, you should know the meaning of the following terms:
- Surrender (Lock-up) Period: It is essentially a schedule. Let’s go through an example to make things easier. Suppose you’ve a 5-year annuity. In the disclosure of the contract, you’ll find a schedule which says – if you liquidate your annuity before a certain period, we’ll charge you X percent of the total amount. That period is known as the surrender period.
- Surrender Charge: It refers to the charges levied if you liquidate your annuity early. It is usually a set percentage of the total that goes down the longer you’ve held the account.
- Free Withdrawal Amount: Not every annuity has these, but most do. It’s the amount of money you can access every year without being subject to surrender charges. In an interest-only withdrawal, you can access only the interest earned on your deposit. In some cases, you can access a fixed percentage (typically 5-10%) of the total amount free of any charges.
- Renewal Process: Typically, a few weeks prior to the maturity date, the carrier sends a letter to the advisor and the client. It specifies the new interest rate the client will get if they decide to renew it. This might be the perfect time to shop for better interest rates. Just like with a CD, if you don’t change or move your money the account will renew at rates/rules set by the company.
- Company Rating: Highly regulated rating agencies, such as AM Best, dig into the books of the insurance company and rate their credit – the best being A++. The right type of rating for you depends on your risk tolerance. Firms with lower ratings usually offer higher interest rates, but they come with an increased amount of risk.
Use This Interest Rate Decision Process
Oftentimes, people start their interest rate planning without a proper process. Just like when you invest into the stock and bond market you need to have a comprehensive process to help you shop for better interest rates.
Begin by estimating your average monthly expenses. It’s important to have at least two to three months’ worth of estimated expenses in your checking account. That way, if you overspend during a particular month, you need not worry about the next month’s expenses.
Next, ask yourself: Have I paid off my debt? Have I delayed my Social Security or pension? As discussed above, doing so can boost your effective interest rate.
The third step involves looking at your expected spending over the next two years. Whatever amount you expect to withdraw from your investments, place it into a high interest savings account. Don’t tie your funds up into investments with long maturity periods. This is crucial from a liquidity standpoint so that you don’t have to pay any surrender charges in the future.
Finally, for the money that’s left over in your bank account, look for long-term investment options, such as two-to-seven-year deposits or annuities. Such accounts can offer the best interest rates.
In the current low interest rate environment, it can be difficult to find good interest rates for your bank money. But it’s not impossible.
If you have any questions during your search for higher interest rates, feel free to contact us and we’ll be happy to guide you!