Editor’s note: This is an update to an article originally published on September 20, 2023.
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CNN
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The Federal Reserve on Wednesday opted not to raise its key interest rate, the same decision it took after its September meeting, leaving the key lending rate at its highest level in 22 years.
Since the Fed affects — directly or indirectly — interest rates on financial accounts and products across the U.S. economy, savers and people with excess cash still have plenty of opportunities to get a much better return on their money than they have for years — and More importantly, a performance that beats the latest inflation readings.
Here are low-risk options to get the best return on funds you plan to use within two years, as well as cash you expect to need within the next two to five years.
The average annual percentage return on bank savings accounts was just 0.59%, according to an Oct. 31 Bankrate survey. That average is kept low with almost zero APY at the biggest banks like JPMorgan Chase and Bank of America, which offered interest rates as low as 0.01%.
However, many FDIC-insured online banks offer 5% on high-yield savings accounts.
These accounts are a great place to put money you’ll likely grow over the next couple of years—to cover anything from a planned vacation or big purchase to an emergency expense or an unexpected change in circumstance, like losing a job.
While yields on bank deposits can change overnight, they have remained high for months and are likely to continue to do so. “In recent months, the Fed has signaled that it intends to keep interest rates higher for longer. … Some banks have responded to this new “longer term” expectation by offering promotional interest rate guarantees on their savings or money market accounts. In the guarantee, a competitive rate is guaranteed to last for several months in the savings or money market account,” said Ken Tumin, founder of DepositAccounts.com.
An online savings account is what certified financial planner Lazetta Rainey Braxton, co-CEO at 2050 Wealth Partners, calls your “cushion” account. She likes the word “cushion” because it describes the flexibility and options such an account gives you to handle both what you want to do in the immediate future and what you might need to do.
Another way high-yield accounts can be useful, Braxton said, is to house money you’ll need to pay off a purchase for which you’ve secured a 0% financing deal for a limited time. In this case, you won’t owe interest on your purchase as long as you pay it off in full before the end of the offer period, which can be anywhere from six to 24 months. In the meantime, the money can grow by 4% to 5% per year in the high yield account.
For your regular household bills, Braxton recommends keeping enough cash to cover a month or two in a regular checking account for faster access. “Not too much, why [those accounts] it won’t do much,” he said.
You can always link the high-yield account to your bank account to transfer funds when needed — just know that it can take up to 24 hours for the money you transferred to show up in your checking account, Braxton noted.
Money market accounts and funds
If you don’t want to set up an online savings account at another bank, your own bank may offer you a money market deposit account that pays a higher rate of return than your regular checking or savings accounts.
Money market accounts may have higher minimum deposit requirements than a regular savings account, but they are more liquid than a fixed-term certificate of deposit or a Treasury bill, meaning they give you access to your money faster, while they may offer you the highest returns available, said Doug Ornstein, senior director for integrated solutions at TIAA Wealth Management.
However, don’t confuse money market accounts with money market mutual funds, which invest in short-term, low-risk debt securities. As of Oct. 31, they had a 7-day average return of 5.19%, according to the Crane Money Fund Index, which tracks the top 100 taxable money market funds.
Unlike money market deposit accounts, money market mutual funds are not insured by the FDIC. However, if you invest in a money market fund through a brokerage firm, your entire account is likely to be insured through the Securities Investor Protection Corp (SIPC), which offers protection in case your brokerage goes bust.
Another high-yield, low-risk investment that’s great for money you probably won’t need to tap into for a few months or even a few years is certificates of deposit.
You can get the best returns on CDs through a brokerage like Schwab, E*Trade or Fidelity. That’s because you can comparison shop for CDs from any number of FDIC-insured banks, and you won’t have to set up individual accounts at each institution.
To get the most benefit from a CD, you need to leave the money invested for a set period. You can always access your principal sooner if you need to, but if you do, you’ll lose at least some interest.
As of Nov. 1, CDs listed on Schwab.com with maturities of three months, six months, nine months, one year and 18 months all yielded at least 5.5%.
Let’s say you invest $10,000 in a six-month CD with 5.5% APY. At the end of that period, you’ll get your principal back plus nearly $274 in interest when the CD matures, according to Bankrate’s CD calculator. If you put it into a one-year CD, you’ll earn $555 in interest, while an 18-month period will generate $844.
If you don’t go through a brokerage, you might get a reasonable deal from your main bank. Tumin said. For example, he noted, Citi came out with an 11-month CD Special with up to 5.65% APY. However, he cautions that with any major bank CD you’ll need to take your money out at the end of the term, or your bank may automatically roll over and lock you into a much lower-yielding CD.
Another option for money that you can leave untouched for anywhere from several months to a few years is short-term Treasury bills, which are backed by the full faith and credit of the United States.
The three- and six-month notes were yielding 5.46 percent and 5.54 percent, respectively, on Nov. 1, while the nine-month and one-year notes offered 5.46 percent and 5.43 percent, according to prices posted on Schwab.com for an investment of $25,000.
If you’re someone who manages your portfolio like a hawk, you may feel comfortable buying bonds yourself from TreasuryDirect.gov. But if you don’t, it might be easier to buy new issues through your brokerage account or invest in a short-term bond index fund, or ETF, said Andy Smith, executive director of financial planning at Edelman Financial Engines.
And if you’re looking at money that will be needed in three to five years, you might consider a diversified fund with high-rated government and corporate bonds, Ornstein said. Yields on four-year AAA-rated corporate bonds, for example, yielded 4.97 percent this week, and three-year AAA-rated municipal bonds (issued by local governments) yielded 4.59 percent, according to Schwab. com.
When deciding on the best accounts and investments for your specific goals and peace of mind, it can be helpful to consult with a fee-only fiduciary — that is, someone who is not paid a commission to sell you a particular investment.
What you will always want to do is create flexibility for yourself so that you have easy access to cash regardless of your schedule for key goals. “What if something changes and you need that down payment much sooner — or your parents need medical care quickly?” said Smith.
This means balancing your desire for great performance with the need and desire for ease of access without penalty. Translation: Don’t chase performance for performance’s sake.
Think of it this way, Ornstein said: Unless you have huge sums to invest or you’re an institutional investor, the difference between a 5.1% versus 5% return is negligible, and could actually cost you more if there are penalties for getting your money out early. “Most of the time convenience is very important. Leave the 0.1%,” he advised.
