How to squeeze higher returns from your savings

A look at your savings options—from online accounts, to money market mutual funds, CDs and 529s—can help your money work harder.

  • By Kevin McAllister,
  • The Wall Street Journal
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A savings account might be the opposite of a get-rich-quick scheme, but it doesn’t have to be the equivalent of keeping cash under your mattress.

Over time, the main goals of a savings account have remained largely unchanged. Easily liquidated and return generating, these federally insured accounts offer a safe place to put money that ensures both accessibility and appreciation over time. The latter has become harder to achieve, however, with lower annual percentage yields in a post-recession world.

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Luckily, low returns of commercial bank savings accounts aren’t the only option available to savers. Other types of accounts can bolster the profits you make off your savings while keeping the money almost as accessible. Focusing on the right strategy can make a big difference over the course of a lifetime.

So what are your options?

Three simple ways to boost annual percentage yield, or your APY, are to set up savings accounts at local banks; use online savings accounts; and invest in money-market mutual funds.

Smaller banks, not subject to the higher costs commercial banks face, are able to offer customers higher rates. Ari Socolow, owner and manager of BestCashCow.com — a site that aggregates savings rates at banks across the country — notes that those local banks more frequently pass the savings on to the consumer as a device to attract more business.

Online savings accounts operate similarly. Without the costs associated with brick-and-mortar banking, online accounts can offer customers interest rates at higher multiples than a traditional savings account.

Money-market mutual funds also offer similar rates, but do so without the federal backing of an online savings account or local bank. Typically full of short-term securities that tend to hold steady, these funds offer a higher return and a lower risk than many other investments.

Any of these options though can cut back on the convenience factors that draw many to traditional savings options. With local banks, direct deposits can be harder to coordinate, and accessing your money while traveling can be more difficult. Online savings accounts might not offer the personal assistance you’d get with a physical bank. And money-market mutual funds don’t have the same level of security that federally-insured funds can provide.

If you do opt to stick with a commercial bank over concerns of that nature, there are ways to get higher rates as long you’re willing to sacrifice some flexibility. If you know you won’t need to access your money saved in the immediate term, you can choose to put money into CDs. Federally insured, these accounts provide better returns, and the only added risk comes with the fees brought about by accessing the money before the term is complete.

Even traditional CDs are getting a face lift though, as banks put more emphasis on Treasury rates’ effects on their consumers. Rising-rate CDs offer customers the opportunity to get their rates raised over the lspan of the CD’s term. Put simply, a savvy saver could keep an eye on the Federal Reserve calendar and strategize around potential rate increases before making savings decisions.

The structure of a CD allows banks to offer better rates due to the assurance that the money will be in their hands for a longer period of time. Some specialized savings options can offer benefits to customers for the same reason. If the money in these accounts is earmarked for a certain time or a certain purpose, the likelihood of withdrawal drops and the money saved goes further.

One of those specialized savings options is a 529 plan, a tax-advantaged savings for higher-education costs. In some state-sponsored plans, your money can grow tax-free and be withdrawn later without penalties when those funds are put toward tuition, room-and-board or even a computer. While 529s offer less flexibility, families who invest in them rather than sticking with a savings account need to save an average of 25% less to achieve the same savings goals, according to data from Morningstar.

Similarly, certain insurance plans offer Health Savings Accounts or Flexible Savings Accounts, which allow you to get tax benefits for contributions earmarked for expenditures related to your health. By decreasing the amount of taxable income, your HSA or FSA contributions help you save in both the short-term and the long-term, provided those funds are used for the appropriate purposes. Your insurance plan may make you ineligible for these specialized accounts, but for many they’re an easy way to boost savings.

Of course, as with any type of account, these specialized savings accounts can have caveats and complexities. Exploring the options out there can help you increase your personal rates, and over the course of a lifetime, each fraction of a percentage point adds up.

Figuring out the best way to save is highly personal and there’s never a one-size-fits-all method. Using a financial adviser to figure out what’s best for you is advisable by the experts.

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