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In the current economic climate, high interest rates are presenting savers with an opportunity to boost their returns on invested money. While the Federal Reserve influences various financial products' interest rates across the US economy, there are still numerous ways to secure better yields than we've seen in years. Plus, with recent inflation data surpassing these returns, it's worth exploring these options.
Here are risk-averse alternatives for money you plan to use within the next two years and for funds earmarked for the next 2-5 years.
High-Yield Online Savings Accounts
According to a report from Bankrate, the average annual yield on checking accounts was only 0.58 % as of December 13th. Major banks like JPMorgan Chase and Bank of America offer rates as low as 0.01 %, yet some FDIC-insured online banks still offer 5 % or more in interest for their high-yield savings accounts.
These accounts are perfect for funds you may use within two years for things like a vacation, major purchases, or emergency expenses, or situations where your circumstances might change unexpectedly, such as job loss.
Just like checking accounts, interest rates for high-yield savings accounts can change overnight, and the banks may not notify you if they reduce rates. Check your monthly statements regularly to ensure you're earning the best possible return. Interest rates have remained high for some time now, and it's expected they'll continue to do so until the Federal Reserve indicates a shift.
Ken Tumin, the founder of DepositAccounts.com, noted: "Inflation has cooled down faster than expected since the FOMC meeting in November, which casts doubt on the 'longer-term higher' scenario."
Lazetta Rainey Braxton, a certified financial planner and co-CEO of 2050 Wealth Partners, refers to online savings accounts as "buffer accounts." She finds the word "cushion" fitting, as it describes the flexibility and options these accounts offer, enabling you to manage whatever comes your way and whatever immediate needs may arise.
Online savings accounts are excellent for short-term goals, but may not generate much interest. They can, however, be easily linked to your checking account though, allowing you to transfer funds as needed.
Save smarter, not harder: Braxton recommends keeping enough money for one or two months in a checking account as a safety net. She advises against holding too much in these accounts, however, as they don't generate much income.
Braxton also mentions that you can easily link your online savings account to your checking account for when you might need to move funds. Keep in mind, though, that it may take up to 24 hours for transferred funds to appear in your checking account.
Money Market Accounts and Funds
If you're not interested in opening an online savings account with another bank, your current bank might offer a money market account that provides a higher yield than your regular checking or savings account.
Doug Ornstein, Senior Manager for Integrated Solutions for Wealth Management at TIAA, indicates that money market funds generally have higher minimum deposit requirements than traditional savings accounts. However, they offer improved liquidity as compared to certificate of deposit (CD) investments or Treasury bills, meaning you can access your money more quickly while potentially earning substantial returns.
Yet, do not mistake money market accounts for money market funds, which invest in short-term, low-risk securities. According to the Crane Money Fund Index, which tracks the 100 most-popular money market funds, their seven-day return rate was 5.19 % as of December 12th.
While money market funds are not FDIC-insured, investing through a brokerage firm may provide protection through the Securities Investor Protection Corporation, which safeguards your brokerage account if the brokerage firm goes bankrupt.
CDs (Certificates of Deposit)
Another high-yield investment option with low risk is a CD. With CDs, you invest your money for a predetermined term without accessing it in the meantime. CDs with the highest yields can typically be found through online brokers like Schwab, E*TRADE, or Fidelity.
To maximize your returns, it's essential to maintain your money in the CD for its full term. If withdrawing funds early, you will lose a portion of the interest earned.
As of December 13th, 6-month CDs offered by Charles Schwab were yielding rates of between 5.25 % and 5.51 % for various terms.
To illustrate, if you invested $10,000 in a 6-month CD with a 5.42 % yield, you would receive $10,267 in total at the end of the term, with $267 in interest returned, assuming the CD matures at the expected rate. If you opted to move that money into a 1-year CD with a 5.45 % yield, you would earn an additional $545 in interest. If instead, you chose a 5-year CD with a 5.30 % yield, you'd receive $2,946 in interest.
Ornstein advises speaking with a financial advisor if you do not use a broker, as they can help you lock in the best possible rates for your investment terms. He also pointed out that Citi Bank has introduced an 11-month CD Special at an impressive 5.65 % annual percentage yield (APY). However, there's a caveat – long-term CDs can typically come with early withdrawal penalties, so be mindful of this when planning your investments.
Treasury Securities
Another low-risk, long-term investment option is U.S. government bonds, also known as Treasury securities. These bonds are backed by the full faith and credit of the U.S. government and can be held for years, though they do carry some level of risk.
Based on data available on Schwab's website, Treasury bills yielded 5.39 % for a three-month term and 5.37 % for a six-month term as of December 13th. Long-term Treasuries with one-year and 30-year maturities yielded 5.25 % and 5.15 %, respectively.
While some investors may choose to purchase Treasury bonds at TreasuryDirect.gov, others may find it simpler to invest in mutual funds or exchange-traded funds (ETFs) that specialize in U.S. government bonds.
Investing in U.S. Treasury bonds is an opportunity to earn landmark returns while minimizing risk. If you're considering investing in long-term bonds like Treasuries, be sure to do thorough research and seek out reputable sources before making any decisions.
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