5 of the Best Ways to Earn Interest on Your Money
The world we live in today is a world of endless possibilities, and this also applies to the world of earning interest on your money. Thus, the question becomes not how to earn interest but what are the best ways? This article will narrow down the 5 best ways to earn interest on your money and break down the pros and cons of each.
What to consider when choosing the best method of earning interest?
One can always choose to save wherever offers the highest interest rates, but because a particular method provides the highest interest rate, it doesn’t mean it’s the best.
A method of determining the best ways to earn interest on your initial contribution is by defining a few parameters:
Variability
Whether the interest rate advertised is a fixed interest that will return a fixed return or has the potential to fluctuate and yield a variable return.
Maturity period
The ability that someone can access their funds at all times or if they have a specific time period that they cannot access nor spend the funds.
Security
Considering whether the funds within the account are insured and/or susceptible to any hack or human error.
Fees
The fees associated with the account that is going to earn you interest.
Checking Accounts
- Variability: Low
- Maturity period: None
- Security: High
- Fees: Low
Checking accounts are considered highly liquid accounts, which means it is effortless to access your money, and thus there is no maturity period. Furthermore, although extremely liquid, checking accounts require the consumer to pay fees such as a monthly service fee ranging from $3 to 15 USD. The user of a checking account will usually obtain a debit card that will allow them to spend their money at most retail stores and restaurants, enabling them to pay with ease. Although, a checking account is different from a savings account as the checking account allows for a large number of withdrawals and unlimited deposits, whereas savings accounts may limit these factors.Although, the problem with checking accounts is the low-interest rate offered compared to the rest of the market, at an average of around 0.03%.
Savings Accounts
- Variability: Low
- Maturity period: None
- Security: High
- Fees: Low
Savings Accounts are incredibly similar to checking accounts because they both are interest-bearing accounts, and they both are highly liquid, making for easy spending and depositing.
Furthermore, both these accounts are incredibly stable and have no lock-in period. However, on the other hand, they both still offer meagre interest rates on savings which makes for relatively bad returns compared to the market. Still, when both are compared, savings accounts net a more significant return over a year. The average interest rate offered by savings accounts is 0.54%, which is pretty average compared to some of the other pathways we will cover later.
An important note regarding checking and saving accounts is the insurance aspect. The federal government within the U.S will insure up to $250,000 if the bank goes insolvent or something goes wrong that the bank could have avoided.
Finally, banks will likely offer high-interest saving accounts that will attach a higher interest rate compared to the market average, but the catch is that these interest rates will probably be volatile and are not fixed; thus, the trade-off is that one must expect higher volatility for higher returns.
Term Deposits
- Variability: None
- Maturity period: Yes
- Security: High
- Fees: Yes, when you exit the term deposit early.
A term deposit is considered a low-risk investment option as you know the interest rate you will receive and the time you will receive it. However, term deposits have a lock-in period which is the time for which your money is not accessible, and if you want to access your money before the lock-in period ends, you must pay a penalty fee. The positive side to term deposits is that the longer you choose to lock your money away, the higher the interest rate. Banks do this to incentivize consumers to keep their money in the bank for longer so they can use the money to loan out to borrowers for more extended periods and thus make more money.
Furthermore, the term deposit accounts are also covered by government insurance for up to $200,000, similar to the savings and checking accounts. Term deposits can have interest rates of around 0.95%, thus higher than savings and checking accounts, but do not forget that there is less liquidity in a term deposit. Therefore, term deposits are not helpful as a spending account but can acquire average amounts of interest over a long period which is good when saving for more oversized items like a home deposit or a car.
Therefore, to recap, a term deposit may be suitable for saving for big-ticket items because it forces an individual to save and not spend due to the lock-in period that doesn’t allow an individual to take their money out of the account for a set time and the longer this period, the higher the interest rate.
Centralized Crypto Savings Accounts
- Variability: High
- Maturity period: None
- Security: Medium
- Fees: None
A crypto savings account has similar functions to a typical saving account because it is also highly liquid; thus, the currency used to store value can be quickly deposited and sometimes spent. However, Centralized crypto savings are different in that the money does not exist in the account as a fiat currency but as a digital currency such as Bitcoin or USDC. Celsius and Blockfi are examples of platforms that foster crypto savings accounts. The downside to placing funds into these accounts is the susceptibility to human error as these platforms are custodying your funds and make transactions on your behalf; an example of these platforms falling victim is the recent Celsius hack where a wallet containing $120 million was drained by a hacker that was able to change the website to redirect one of Celsius’s partner’s domains to a fraudulent site linking to phishing contracts in the place of the ones that Celicus would usually deposit funds into to earn interest.
The apparent positive side to crypto savings accounts is the interest rates that are to be offered upwards of 9%, significantly higher than all the other interest generation methods.
DeFi Savings Account
- Variability: Low
- Maturity period: None
- Security: Medium
- Fees: None
DeFi savings accounts are similar in that they can offer those high-interest rates, but ultimately the user has complete control over their funds; thus, DeFi savings accounts are less susceptible to human error.
In recent times, DeFi savings accounts can access yield aggregators such as mStable that will use the power of smart contracts to assign your funds to the highest interest rate opportunities that are offered at that point in time. On the other hand, while interacting with these smart contracts has benefits, there are still real risks that open individuals interacting with these protocols, such as Aave and mStable, to smart contract hacks.
In saying this, lately, there has been a rise in decentralized insurance brokers such as Nexus Mutual that cover loss of funds due to smart contract vulnerabilities.
If you are looking for an easy way to access a DeFi savings account, our app Minke is the easiest way to onboard into DeFi with easy top-ups with Apple Pay and a fintech-like interface that you’re familiar with. We give you access to applications like Aave and mStable that have recently had interest rates as high as 14%. You can signup for the waitlist: https://waitlist.minke.app/.