What is the safest way to earn a higher interest rate on our money than by using our traditional savings account or a money market account?
My wife and I are looking to buy our first home in 3-5 years and are wanting to save to have a 20 percent down payment. What is the safest way to earn a higher interest rate on our money than the marginal amount of interest we make in our traditional savings account or the roughly 1.5 percent in a money market account?
In order to stay within your "safest" criteria, you would want to stick with an FDIC or NCUA insured account. (The NCUA is the government insurance for credit unions, the same as the FDIC is for banks). You can get slightly higher interest rates by shopping around for high-interest savings accounts from online banks and credit unions. Currently (November 2018), rates on savings accounts are between 2% and 2.5% from the highest offers in the country.
Another option to explore is to open a Certificate of Deposit (CD) after shopping around for the best yields. 5-year CDs are approaching 4% and you should be able to get around 3.5% for a 3-year CD. This would be a good idea to explore even if you find the perfect home before the CD matures. If you must break the CD early, you don't lose any of your money, and the 'fee' is simply the bank keeping a few month's interest they paid you. You can schedule all the CDs mature around the time you want to buy the home to make the money available to you when you need it. You can also choose to stick with 1-year CDs to give you more flexibility and then switch to a savings account when you start looking for a home.
Money market accounts might also provide a little higher interest yield than a savings account, but with easier access to the money than a CD. When shopping around, make sure you differentiate between a money market account and a money market fund. A money market fund is a mutual fund which invests in very safe cash-equivalent investments. This makes them safe, but they can lose value. Funds are also not FDIC/NCUA insured, which may not fit your criteria. Also, realize that not all banks/credit unions are FDIC/NCUA insured, although nearly all are. Make sure to look for the logos of the FDIC or NCUA if you want the protection of the government backing.
Investing in Safer Assets May Be An Option
You may also want to explore the possibility of investing in a fund which invests in very safe investments. An example to research and explore would be a Short-Term Treasury Bond Fund. Treasury bonds are backed by the full faith and credit of the United States Government, which means they are considered safe investments due to the extremely low chance of default, as the U.S. Government is unlikely to go bankrupt. When interest rates rise, however, these funds do lose value. Using short-term bonds means you will have less risk from interest rates potentially rising. As an example (not a recommendation), Vanguard's short-term treasury bond fund is currently yielding 2.9% (November 2018). Another option would be a Treasury Inflation Protected Securities (TIPS) fund, which will have a lower yield but will give you protection against inflation. Inflation protection could be helpful considering inflation will increase the price of a house along with everything else.