You probably are aware that interest rates are on the rise. But the average interest rate on savings accounts is still 0.16%! There are some alternatives to savings accounts that earn more interest and can give you relatively easy access to your money. Here are some options to consider:
High Yield Savings
A high yield savings account is an attractive option for those who want to grow their savings while having easy access to their money.
With the recent rise in interest rates, high yield savings accounts are paying around 2.50%.
Like traditional bank accounts, these are FDIC insured up to $250,000 and offer a safe place to put your money
The main drawbacks is account holders can only withdraw or transfer money out of their account six times per month without having to pay a fee.
Money Market
The main difference between a money market and a high yield savings account is the access they provide to your money. Money market accounts tend to come with checkbooks, high yield savings accounts typically don’t. Also, the interest rate is generally lower than a high yield savings account.
Certificate of Deposit (CD)
A certificate of deposit allows you to earn interest on a lump sum for a fixed period of time. The downside is there can be penalties if you take your money before that time period is over.
The longer the term that customers are willing to have their money tied up, the higher the interest rate available. For reference, one-year CDs are paying around 4.0%.
Treasury Bills
Most checking and savings accounts, CDs and money market accounts offer deposit insurance up to $250,000.
But what if you need to stash more than $250,000? You might want to look into U.S Treasury bills, which are short-term term debt obligations with a maturity of a year or less. The current rate on a 1 year treasury is 4.7%.
These are considered one of the safest investments because they are backed by the full faith and credit of the U.S. government.
I-Bonds
As inflation rises, a low risk investment has gained more attention are the Series I savings bonds known as inflation or I-Bonds.The rate for I bonds issued from November 2022 through April 2023 is 6.89%. The period before that paid 9.62%.
The cons are you must own them for a year. If you sell them before the 5 year holding period is up, you forfeit the last 3 months of interest. The maximum amount a taxpayer can buy per year is $10,000.*
Bonus: Long Term Investments
There are plenty of individuals with too much in their emergency fund. Once you have your emergency fund established, there are better options for your cash.
Look to invest in assets that have historically delivered returns that outpace the rate of inflation. Stocks, for example, can lead to higher returns, though investors will need to bear the inevitable ups and downs of the market.
Before doing this make sure you have already established your emergency fund (3-6 months savings). These investments should not be used for short term cash needs.
Bottom Line
Savings accounts’ combination of safety and liquidity make them a good place to put your emergency savings and funds for major purchases. However, alternatives can pay better interest and sometimes be just as safe. If you have any questions, please don’t hesitate to reach out.
George Maroudas
847-550-6100
george@pmgwealth.com
Twitter @ChicagoAdvisor
Sources and Disclaimers:
Interest income is subject to ordinary income taxes.
*There are some circumstances when you can buy more than $10,000; tax return, trust, etc.
CDs rates at of 11/1/22 from Bankrate
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Past performance is no guarantee of future results.
CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
