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Got spare cash? You can now earn a higher level of interest than in the past

Government bonds and online banks pay a lot more than traditional banks

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Photo (c) Fizkes - Getty Images
For more than 20 years it hasn’t paid to save your money. Banks paid less than 1% on savings accounts and certificates of deposit (CD) didn’t pay much more.

But as the Federal Reserve has aggressively raised a key interest rate, that has begun to change. A new report by the Financial Technology Association (FTA), a Fintech trade group, shows banks have begun to increase the interest they pay in order to attract savers.

In particular, the report found online banks are taking the lead, with the interest rate on a passbook savings account rising above 2% in October for the first time in years. That stands in sharp contrast to brick-and-mortar banks. According to Bankrate, the average rate on savings accounts is around 0.16% with some of the larger banks paying almost nothing.

There are plenty of other savings instruments that pay more in interest but many consumers feel more comfortable with the traditional savings account. The money is available for withdrawal at any time, there are no minimum deposits, and the funds are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC).

Current rates

The report found that Ally Bank offers attractive terms this month. The current savings account rate has risen to 2.35% and the bank is paying an additional 1% cash bonus for new accounts.

At Marcus, the online affiliate of Goldman Sachs, the rate on a savings account is also 2.35%. It’s even higher at LendingClub, where the rate is 3.12%.

Savers who don’t mind tying up money for longer periods of time can earn even higher rates. According to Bankrate, CIT Bank is paying 4% on a minimum deposit of $1,000 in an 18 month CD and the account is FDIC-insured.

Marcus is paying 3.6% on a 12-month CD with a $500 minimum deposit, an offer matched by Bask Bank. Brick-and-mortar banks pay considerably less. Chase only pays 0.1% on a 12-month CD with a $1,000 minimum deposit.

To explore the best online banks, check out ConsumerAffairs’ guide to the top 10 online banks, with thousands of verified consumer reviews.

Government bonds

Loaning money to the U.S. government currently pays even more. Currently, most U.S. Treasury bonds are paying more than 4%. 

The two-year Treasury bond currently pays around 4.4%. Bonds can be sold during that time at either a profit or loss but kept the full two years until maturity, the bondholder is guaranteed to get all of their money back – plus interest – a guarantee backed by “the full faith and credit” of the U.S. government.

Just about the only savings instrument that currently pays more is the Treasury Department’s I Series bond. If purchased before Friday, Oct. 28, it pays 9.6% for the first six months. After that, the bond carries a still attractive rate of 6.48%, resetting every six months to correspond with the inflation rate.

The bond-holder can cash in the bond after 12 months, but if they hold it for fewer than five years they lose three months of interest.

As with any investment, it pays to do your research and consult with a qualified and objective financial adviser.

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