The average rate of return for typical savings accounts is pitiful, and nowhere near inflation even on a good year. This means your hard-earned savings is actually losing value over time! There are lots of options out there that claim to provide reasonable returns. Unfortunately, most of them impose limits, and many make you jump through too many hoops to make them worthwhile. However, there are some good accounts out there that provide reasonable rates and peace of mind for your emergency fund or short-term savings goals. These are the best ones I have found that require the least effort.
Use these options for the portion of your emergency savings that you may need to access in a couple business days or less.
DCU is a credit union that offers a savings account (https://www.dcu.org/bank/savings/primary-savings.html) that pays 6.17% APY on up to $1000. Each person is allowed to have one such account and must make a one-time, $10 donation to Reach Out For Schools (cheapest donation option to join). This essentially means you pay $10 once to get access to this savings account forever. There are no requirements to earn the interest rate. You can set up an automatic withdrawal of $5 at the start of each month to keep the balance right around $1000.
These cards come with savings accounts that pay 5% or 6% APY (average 5.28%) on up to $7000 total across the accounts. Click here for more information...
Genisys is a credit union that offers a high yield checking account (https://www.genisyscu.org/accounts/checking/geniuschecking) that pays 5.25% APY on up to $7500. You must deposit $5 into a low-yield savings account and leave it alone to maintain membership. Joining nationwide (outside MN, MI & PA) may require a donation to a charitable organization as well. To be eligible for the high yield, you must enroll in e-statements and make 10 debit card transactions of $5+ per month. I linked my account to Cash App. At the end of each month, my main account transfers $75 into Genisys. At the start of each month after about $25 interest has accrued, I add funds to my Cash App 10 times ($5, 6, 7, 8, 9, 10, 11, 12, 13, ~19) to meet the debit transaction requirement and bring the balance back down to $7500. I then transfer that to another Cash App account of mine and withdraw it back out into my main account.
Several brokerages offer high yield money market mutual funds with small or no minimum investment requirement. For example, Schwab offers SWVXX with no minimum investment and currently yields 5.14%. The rates of return for these funds vary as interest rates change, but they seem to track pretty closely with CDs and US Treasury Series I Savings Bonds without having your money locked in for extended durations.
Use these options for the portion of your emergency savings that you can accept less liquidity. It may take longer to access these funds, or you may forfeit some interest by withdrawing from them. Also, you should prefer tier 1 savings options over these if those rates are better.
US Treasury Series I Savings Bonds provide a base rate of return for 30 years (usually at or near zero). In addition to that, they have an inflation rate that updates every six months. Even if inflation goes negative, your total rate will never go below zero. In times of high inflation and low interest rates, these are a good option for maintaining the spending power of your emergency savings. Income taxes on the earnings can be deferred until you withdraw, and there is no state or local tax on them (only federal). If used for education, the earnings are even exempt from federal income tax.
You are better off buying near the end of the month, because the bond effective date is the first of the month either way. Your money is then locked in for the first year, and you can withdraw penalty-free after five years. If you withdraw prior to five years, you just forfeit the last three months of interest. If future I Bonds or other savings accounts offer a more attractive rate, you can withdraw, pay taxes on the gains, and buy new I Bonds or transfer the funds to the other account. You are better off withdrawing near the start of the month, because the interest accrues at the end of the month and you will not earn anything for the partial month in which you withdraw.
Each person is limited to buying $10000 per calendar year from TreasuryDirect.gov, but you can also get an additional $5000 via your federal tax refund. You can buy a batch at the end of one year, buy another batch at the beginning of the next year, and potentially get another batch with your federal tax refund, and have a nice tier 2 savings cushion. For years after that, you can shuffle portions of them into higher yielding I Bonds or add to your overall balance if necessary.
Start a modified CD ladder (if 1-year CD rates are above inflation). I call it modified because most CD ladders you read about focus on having one CD that matures each year. My modified ladder gives you a CD that matures each month and doesn’t lock you into an interest rate for more than one year. Rates rise and fall a lot, and can rarely keep up with stock market investing, so CDs are best used for short-term commitments. Don’t worry if an emergency does come up, because you can still take the money out of the CDs by forfeiting some interest.
Divide your remaining savings target by 12. This is how much each CD will hold. Set yourself a reminder (ex. first Thursday of each month) to open a CD. Find the best 1-year CD rate, or just stick with the same bank you use for your main account if they are competitive. Open the CD with the money from your main account. Set it up so that when the CD matures, it gets distributed to your main account instead of automatically renewing.
When each CD matures, open another 1-year CD at the bank with the best rate. If you want to increase the value of your emergency fund, you can use some or all of the earnings for the new CD (and add additional money of course). Otherwise, collect the earnings and use them to invest in more lucrative options.