How to Optimize Your Savings

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Saving for the future is always a good thing, whether you're building your emergency fund or setting money aside for retirement. Equally important is how you do it. Being strategic about your savings can help you get better returns—and grow your money at a faster rate. Here are five simple strategies to optimize your savings.

1. Open a High-Yield Savings Account

Not all savings accounts are created equal. Traditional savings accounts, which are commonly offered by major banks, had an average interest rate of just 0.47% as of March 2024. That means you'll earn $4.70 for every $1,000 you deposit. High-yield savings accounts are different and typically offer much better returns. Online banks are known for their competitive annual percentage yields (APYs). As of April 2024, some rates are up to 5.35%.

You can link a high-yield savings account to your checking account and make transfers whenever you like. And if you need to tap your savings, your money will be easily accessible. That makes it a good place to keep your emergency fund or cash you're squirreling away for another financial goal. Just keep in mind that some financial institutions limit consumers to six electronic transfers and withdrawals per month on savings accounts.

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2. Leverage Certificates of Deposit (CDs)

You put money into a CD for a predetermined amount of time. When the term ends, you'll get back your initial investment plus interest. APYs are usually higher when compared to savings accounts. As of April 2024, some rates are as high as 5.5%.

The main downside is that CDs don't provide easy access to your money: You can expect an early withdrawal penalty if you take your money out before the CD matures. The amount you pay depends on your CD term and how much you withdraw. In some cases, it could be as much as 12 months' worth of interest. However, CDs can be a good holding place for money you don't plan on using in the immediate future. That might be a portion of your emergency fund or money you're setting aside for a specific financial goal.

3. Automate Your Savings

Getting in the habit of saving can pay off over time. If you put $100 into your emergency fund every month, you'll have $1,200 after a year—maybe sooner if you come into a cash windfall like a tax refund or work bonus. Automating your savings can make things even easier because you won't have to manually transfer money into your savings account each month.

Instead, you can set up automatic monthly transfers and forget about it. This approach can also remove the temptation to spend that money while it's in your checking account. Just be sure to account for these transfers in your monthly budget. That can help you plan accordingly and prevent you from accidentally overdrawing your checking account.

4. Use Tax-Advantaged Accounts

Some accounts offer tax perks while you save. Below are a few tax-advantaged accounts to consider:

  • 401(k)s: These are employer-sponsored retirement accounts that allow you to make pretax contributions that reduce your taxable income. You'll also enjoy tax-deferred growth. Just be aware that 401(k) withdrawals count as taxable income.
  • Individual retirement accounts (IRAs): Like a 401(k), a traditional IRA allows for tax-deductible contributions. Your savings will also grow on a tax-deferred basis, but you'll owe taxes when you take money out of the account. Roth IRAs are different because they're funded with after-tax dollars. You won't get a tax break on contributions, but you can withdraw money tax-free in retirement.
  • Health savings accounts (HSAs): If you have a high-deductible health plan, you can make tax-deductible contributions to an HSA. Your money will then grow tax-free, and you won't be taxed on withdrawals that are used for qualified medical expenses.
  • 529 college savings plans: This type of account lets you save money to cover certain education expenses. That includes K-12 tuition, as well as college tuition, fees, room and board and other costs. Qualified withdrawals from a 529 plan are tax-free. Some states also offer deductions and credits on 529 contributions.

5. Spread Your Savings Across Multiple Accounts

Another way to optimize your savings is to leverage multiple accounts. For example, you might keep some money in a high-yield savings account, while investing a lump sum in a CD. You might even have more than one high-yield savings account, with each one devoted to a different financial goal.

CD laddering is another option. This involves holding multiple CDs with various term lengths. That can provide liquidity on a rolling basis as each one expires.

The Bottom Line

You have options when it comes to optimizing your savings. Leveraging high-yield savings accounts, CDs and tax-advantaged accounts can help you get the most out of your money—especially if you have multiple accounts and automate your savings.

Be sure to prioritize your credit health as you build your savings. A strong credit score could unlock good rates and terms on personal loans, mortgages, credit cards and more. You can check your FICO® Score and credit report for free with Experian.