How your savings could earn $200 a year

A fascinating shift is unfolding in the banking world: high-yield savings accounts still deliver impressive returns, even as interest rates begin to drop.

Why settle for less when your money could be working harder? Online banks now offer interest rates of around 4% annually, a complete contrast to the 0.01% interest many big banks provide. With $5,000 in savings, you can make $200 a year.

"High-yield savings accounts are still a good deal," says Alan Bazaar, who runs Hollow Brook Wealth Management in Katonah, New York. "They're perfect for emergency funds or money you might need quickly."

The story behind these rates starts with the Federal Reserve, which began lowering its key interest rate last September as inflation cooled down. They cut rates again, and many expect another cut in December. Usually, when the Federal government cuts rates, banks follow suit. But something different is happening this time.

Many online banks are fighting to keep customers by maintaining higher rates. LendingClub Bank, for instance, still offers 5% interest, though you need to deposit at least $250 monthly to get that rate. Pibank, run by Miami's Intercredit Bank, goes even further with a 5.5% rate. Openbank, a new digital branch of Santander Bank, matches the 5% rate if you can put in $500 to start.

Ted Rossman, who watches banking trends for Bankrate's financial website, points out how far we've come. "Just a few years back, savers were lucky to get 1% on their money," he says. "Getting 4% or 5% today is pretty remarkable."

But here's the surprising part: many Americans are missing out on these higher rates. A new survey by Morning Consult shows that 40% of people with regular savings accounts need to know what interest rate they're getting. More than half think they'd have to switch banks for better rates.

That's not true, says Rossman. He suggests keeping your regular checking account at your local bank while opening a high-yield savings account online. "You can link the accounts electronically and move money back and forth in a day or two," he explains.

Some people worry about putting money in online banks they've never heard of. But Rossman says there's little to fear if the bank has FDIC insurance. "Look for the FDIC logo on the bank's website or check the FDIC's BankFind tool," he advises. This insurance protects up to $250,000 per person per bank if anything goes wrong.

Openbank's Swati Bhatia sees the competition for savers' money continuing. "Rates will change, but we plan to stay competitive," she says. This battle among banks could mean good news for savers, even as the Federal Reserve keeps cutting rates.

For those wanting to earn even more, some banks offer certificates of deposit (CDs). These accounts lock your money away for a set time but pay higher rates. Even traditional banks now offer CDs paying 4% or more, depending on how long you're willing to wait to get your money back.

Some use smart tactics known as a CD ladder. Instead of locking all their funds into a single certificate of deposit, they divide their money across CDs with varying terms – with $15,000, you could allocate $5,000 into six-month, nine-month, and one-year CDs. As each term matures, you gain flexibility. Then, it's the individual's choice to cash it out or reinvest, depending on the interest rates. 

Money market funds offer another option, though they work differently than bank accounts. These funds, available through brokerages, invest in safe government bonds and similar investments. While they're not FDIC insured, they're considered very safe and currently pay around 4.46% on average.

For those chasing higher returns, short-term bond funds are the best option. These funds focus on corporate bonds that mature within a year, often delivering yields near 7%. While the rewards are impressive compared to traditional savings accounts, they are highly risky.

In a world where interest rates are dropping, the opportunity to grow your savings is still possible. With a little savvy and a willingness to explore lesser-known online banks, you can uncover impressive returns that might surprise you.

Many financial experts expect the Federal Reserve to keep cutting rates, but probably more slowly than before. Meanwhile, banks' competition for deposits means savers might continue seeing attractive rates well into the future.