Whether you’re saving for a short-term goal, retirement, or an emergency fund, taking advantage of the benefits of higher returns is wise. With rising interest rates, investors have a wider selection of competitive options to invest their money in.
According to Mark Hamrick, a senior economic analyst at Bankrate, this presents a highly opportune moment to leverage the heightened yields from savings. The minutes from the Federal Reserve’s recent meeting indicate a cautious approach but also suggest a possibility of additional rate increases. Consumers can become confused by the various savings options available to them, especially when considering the uncertainty of future policy decisions.
Here are four alternatives that merit careful consideration:
#1 High-yield savings accounts:
Savings accounts offering elevated yields, with the top 1% averaging a rate of 4.69% (according to DepositAccounts.com), provide an attractive option. Surprisingly, only 22% of investors earn 3% or more on their cash, based on a Bankrate survey conducted earlier this year. These accounts offer convenient access to your funds and are secure havens for your cash.
Most savings accounts are backed by the Federal Deposit Insurance Corporation (FDIC), offering up to $250,000 of coverage per bank, per account type. Despite expectations of the Federal Reserve’s interest rate reductions next year, online savings account rates are not expected to drop significantly until the policy shift occurs.
#2 Certificates of deposit (CDs):
Certificates of deposit, often called CDs, ensure a fixed interest rate for a predetermined period, making them a favorable choice. Investors can enjoy competitive rates if they opt for online banks, local credit unions, or larger financial institutions. As of August 18, the top 1% average for one-year CDs can reach as high as 5.55%, as reported by DepositAccounts.com. These rates are also “locked in,” meaning that even if interest rates decrease, your investments will continue growing at the same rate until the CD matures.
#3 Treasury bills:
With interest rates on the rise, Treasury bills have emerged as a compelling alternative for cash, offering yields surpassing 5% as of August 18. Backed by the U.S. government, Treasury bills are considered exceptionally secure and come with terms ranging from one month to one year. They can be purchased through TreasuryDirect, managed by the U.S. Department of the Treasury, or via a brokerage account. While buying through a brokerage account provides greater liquidity for faster access to funds, it comes at a slightly lower yield than purchasing T-bills through TreasuryDirect.
#4 Money market funds:
Short-term money market funds represent another viable option, according to certified financial planner Chris Mellone of VLP Financial Advisors. Distinguished from money market deposit accounts, these funds primarily invest in lower-credit-risk, shorter-term debt like Treasury bills. Yields closely mirror the federal funds rate, with some of the leading money market funds offering over 5% returns as of August 18 (according to Crane Data). Given the potential for more interest rate hikes from the Federal Reserve, Mellone favors short-term money market funds over CDs due to their higher rates and increased flexibility. He describes it as “the best of both worlds.”
However, it’s important to note that while money market funds are unlikely to depreciate significantly, declines can occur, and there’s no FDIC protection in place.
In navigating these diverse options for maximizing your returns in a changing economic landscape, it’s essential to align your choices with your individual financial goals and risk tolerance. In the midst of changing interest rates and ongoing uncertainties, the solution is to find the right balance between security, growth, and accessibility.