Low Risk, Stable Returns: 6 Best Ways to Earn Interest in 2022

A photo to accompany a story about the best ways to earn interest Images by Getty Images; Illustration by Next Advisor
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With the stock market experiencing volatility, crypto prices crashing on the regular, and rising inflation making everything more expensive, many investors are wondering whether there’s a better way to put their cash to work without the risk of losing money.

For some, that means going back to the basics: interest-bearing deposit accounts and government bonds, which are seeing higher yields as the Federal Reserve raises interest rates and financial institutions follow suit. 

“There’s a lot of uncertainty in the markets right now, so it makes sense that some people would look for relatively stable ways to earn interest,” says Kevin L. Matthews II, a former financial advisor and founder of the personal finance education website Building Bread. “We haven’t seen these types of rate hikes for a while, so savers have the potential to benefit from the current climate.”

If you’re looking for a little boost for your savings, or if you’re hoping for a fairly safe way to squeeze a little more yield out of your portfolio, here are some of the best ways to earn interest in the coming year with little risk.

High Yield Savings Accounts

Savings accounts are well-known for having low yields, according to Anthony Carlton, CFP, vice president and wealth advisor at the firm Farther. However, thanks to recent Federal Reserve rate hikes, account yields are on the rise.

“These aren’t the same rates that we saw before the stock market crash of 2008, but they are on the rise,” Carlton says. “They’re likely to go higher, so that’s nice to see for many savers.”

The national average yield on all savings accounts is 0.07%, according to data compiled by the Federal Deposit Insurance Corporation (FDIC). However, a high yield savings account, which offers much higher interest rates, might offer an annual percentage yield (APY) as high as 1%, depending on the institution. In general, high yield savings accounts are associated with online banks and credit unions, as opposed to more traditional banks. 

When looking for yield, Carlton suggests paying attention to banks and credit unions offering an annual percentage yield of at least 0.50% and skipping brick-and-mortar institutions that offer standard savings accounts with much lower yields.

When choosing a bank or credit union to open a savings account with, make sure that the financial institution is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) so that your deposits are protected in the event of a bank failure. You should also try to find a savings account without any monthly fees or minimum balance requirements. 

High-Yield Checking Accounts

Checking accounts are bank accounts designed for regular, everyday transactions. They are more liquid than savings accounts, in that there are no limits to monthly withdrawals and they allow easy access to your cash through debit cards and check writing privileges. Traditionally, savings accounts are limited to six withdrawals per month, although that rule was suspended in 2020. It might be reinstated, however, although there is no explicit timeline.

Because they are more accessible than savings accounts, checking accounts often come with a lower yield. The nationwide average for interest-bearing checking accounts is 0.03%, according to the FDIC, although there are some that offer yields above 1%. You’re more likely, however, to find high-yield checking accounts with interest rates of between 0.10% and 0.25%. 

“Many high-yield checking accounts, like high-yield savings, put a lot of conditions on you to get the best rates,” Matthews says. For example, you might have to maintain a minimum balance or have a certain number of direct deposits into your account each month. There might also be fees associated with the account. 

“But if you can get a little extra yield from an account that you use regularly, it can make sense to put your money to work for you,” Mathews adds.

CDs and CD Ladders

Certificates of deposit (CDs) are also offering higher interest rates than what’s been seen in recent years. The nationwide average yield for a one-year CD is 0.21%, while the nationwide average rate for a five-year CD is currently 0.39%. However, different financial institutions might offer higher CD rates, depending on how much you’re willing to keep in the CD.

One strategy to take advantage of rising rates is to build a CD ladder, according to Parker West, vice president of strategy, analytics, and pricing with the Navy Federal Credit Union Savings Products Division. With a CD ladder, you divide your money into CDs with different maturity dates. When the shorter-term CD reaches maturity, you use the money to purchase a longer-term CD and take advantage of the current rate — which might be higher.

However, the main drawback to this approach is that the money is less liquid, as you face an early withdrawal penalty when you withdraw the money before maturity. 

“People are becoming more comfortable with locking some of their money up,” West says. “The last couple of years, many people have extra money from stimulus [payments] and because spending was down during the pandemic. Now they have some extra [cash] and might be able to afford putting it in a less-liquid account.”

Money Market Accounts (MMAs)

A money market account (MMA), not to be confused with a money market mutual fund, is sometimes seen as a hybrid between a savings account and a checking account. You have access to check writing and debit card transactions, but you’re still limited to six withdrawals per month during normal times. In general, MMAs offer tiered interest rates based on your balance. As with savings accounts, during this time when the withdrawal limit is suspended, some financial institutions might still charge extra fees if you exceed the withdrawal limit.

“Some people like the idea of moving money to money market accounts because the rates are higher, but there’s more flexibility than with a CD,” West says. 

The nationwide average interest rate for MMAs is 0.08%, according to the FDIC. However, as with other accounts, you might find a better yield when you visit different institutions (or online banks) and can maintain a higher balance. Many MMAs offer interest rates around 0.80%, which can be attractive to some consumers who want an account that offers convenience in transactions while providing a higher yield than a regular savings account.

Government-Backed Bonds

Government-backed bonds are considered long-term securities, as opposed to Treasury bills (T-bills), which are short-term securities with maturities of less than a year. Bonds might be looking fairly attractive to some investors right now, according to West.

“Historically, Treasury bonds have offered a pretty low return,” West says. “However, I-bonds are especially attractive right now with a yield above 9%. Long-term savers like that EE bonds guarantee double the face value if you keep them for 20 years. It’s locking your money up, but it comes with a long-term guarantee.”

When purchasing government bonds via Treasury Direct, experts like West and Matthews generally focus on I-bonds and EE savings bonds. They offer a level of guaranteed return, and they are backed by the U.S. government, which means that many investors consider them among the safest in the world.

  • I-bonds are inflation-linked bonds with two parts to the interest rate. The first part is a fixed rate, while the second part is a variable rate tied to inflation. Interest rates are set twice a year. The current yield for an I-bond bought in May 2022 is 9.62%.
  • EE savings bonds have a fixed rate, based on when you buy them. For EE savings bonds purchased in May 2022, the fixed rate is 0.10%. However, if you keep the bond for 20 years, you receive double the face value.

Both EE savings bonds and I-bonds must be held for at least one year before you can cash them in. If you cash them in between one year and five years, you will forfeit the last three months of interest as a penalty. If you cash them in after five years, there is no penalty. 

Pro Tip

Remember that I-bonds may be attractive now, but the rate is only good for six months at a time and the yield could drop dramatically if inflation falls.

“It’s important to be careful about getting excited about I-bonds right now,” warns Matthews. “You’re limited to $10,000 a year in purchases, and the rate changes every six months. If inflation disappears, the yield does, too. But these can still be good investments for someone who wants to protect some of their portfolio from inflation.”

Treasury Bills

Treasury bills, or T-bills, are sold at auction and are considered short-term investments. You can buy them with maturities of four, eight, thirteen, twenty-six, and fifty-two weeks. Auctions are held weekly, except for 52-week maturities, which are held every four weeks. 

When buying T-bills, you usually buy them at a discount from the face value, or stated value of the bill. For example, you might buy a $100 T-bill with a maturity of 26 weeks for $96. When that bill reaches the maturity date, you receive $100. The $4 in profit is considered your interest. 

Understanding the yield can be a little tricky, since the Treasury lists it as the “coupon equivalent.” Basically, this is a term that lets you compare what the yield might be if the T-bill were a bond. Here are some recent coupon equivalents ranges from recent auctions:

  • Four weeks: 0.39% – 0.67%
  • Eight weeks: 0.68% – 0.79%
  • Thirteen weeks: 0.91% – 1.03%
  • Twenty-six weeks: 1.45% – 1.48%
  • Fifty-two weeks: 1.97% – 2.07%

It’s important to note that twenty-six and fifty-two-week maturities have been moving inversely to the shorter maturities. With those longer maturities, the coupon equivalent has fallen in recent weeks, as opposed to the shorter maturities, where it has risen.

“For short-term money, it can make sense to put it in a T-bill,” Carlton says. “That short-term note can turn over quicker as interest rates go up. If you get a 20-year bond, you might be stuck.”

Bottom Line

For some, it might make more sense to consider paying down high-interest debt, rather than chasing yield, according to West. 

Emergency savings and retirement savings are critical,” he says. “Once you have the basics, rather than beefing up those accounts, you might want to explore whether to pay down that high-interest debt, which is only going to get more expensive as rates rise.”

In the end, Matthews suggests considering your own risk tolerance and need for liquidity before locking up money in the name of interest earnings.

“We’re in an interesting situation right now, and it’s tempting to lock up your money in something safe with an attractive yield,” Matthews points out. “However, don’t forget to look into stocks if you have a long time horizon. Now might be a good time for you to buy extra shares, especially if you won’t need that money for more than a decade.”