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Today's move by the Federal Reserve to boost short-term interest rates by a quarter percent may not make you happy if you're paying off loans or credit card bills. But it could be good news if you're stashing away money in savings and money market accounts.
Something to realize, though, is that not all financial institutions will give you higher rates. If you're currently keeping your cash savings in a walk-in bank, for example, this might be the time to look into alternatives. Online banks and credit unions, for instance, are offering significantly higher interest rates.
Large national players like Ally Bank, Barclays, Capital One and Marcus by Goldman Sachs are currently paying interest of 2 percent and more on new online savings accounts, and 2.6 percent or more on one-year certificates of deposit, according to DepositAccounts.com. Those rates could inch higher in response to today's news.
Some smaller players are competitive, as well. MySavingsDirect, a division of Emigrant Bank, is offering a 2.4-percent annual percentage rate on savings accounts, with no minimum balance and no fee. Palisades Federal Credit Union, based in Pearl River, N.Y., is paying 3 percent on a 13-month CD, with a minimum deposit of $500.
By contrast, the megabanks Chase Bank and Wells Fargo are currently paying 0.01 percent on traditional savings accounts, according to Bankrate.
Where you deposit your savings depends, in part, on your tolerance for risk and when you might need the funds, says Benjamin Sullivan, a certified financial planner and portfolio manager with Palisades Hudson Financial Group in Austin, Texas. "It also depends on how much effort you’re willing to put in to maximizing your interest," he says.
Here are four strategies to consider. There’s nothing to stop you from using more than one depending on your goals.
Strategy: I Want Safety and Maximum Interest on Funds I Access Regularly
Online savings accounts currently offer yields of 2 percent or more annually. They’re among the safest savings vehicles, and up to $250,000 in deposits per holder, whether through a bank or credit union, is covered by federal insurance. (A joint account with two holders is insured up to $500,000.)
You can find the rates offered for these high-paying accounts through websites such as DepositAccounts and BankRate. (With DepositAccounts, scroll below the top listings, which paid for placement there; with BankRate, click on "APY" to get annual percentage yields in descending order.) Check the minimum deposit, fees, and features (such as ATM access and check writing).
Note the limitations. Baltimore-based CFG Community Bank, for instance, is offering an attractive 2.4-percent interest rate to online savings account customers. But consumers need to deposit a minimum, $25,000 for that rate and pay $10 a month in fees.
Also, check out the account’s rate history on DepositAccounts, recommends Allan Roth, chief executive of Wealth Logic, a wealth management company based in Colorado Springs, Colo. If the account has been around several years, there’s less likelihood the current APY is a teaser rate that will drop later. “You’re not locked in, but most people have better things to do than looking at rates and moving around their money," Roth says.
Money market deposit accounts offer up to 2.35 percent these days. These accounts are similar to savings accounts, but with some additional benefits and restrictions. Offered by banks and credit unions, they’re insured like savings accounts, up to $250,000 per individual holder. Institutions are able to provide higher rates on these accounts by investing your money in secure, short-term Treasury debt.
If you can stash a significant amount in a money market account, you may benefit from more rate stability than in an online savings account, says DepositAccounts' founder, Ken Tumin. That's because some money market accounts offer higher rate tiers for balances above a certain amount—say, $10,000—and are less likely to change rates at those higher tiers later.
Make sure the money market account has the features you need. Capital One, for instance, offers no check writing for its 360 Money Market account.
On DepositAccounts, check customer reviews for consumer experiences opening, maintaining, and closing accounts. Also note the financial health of the bank, which DepositAccounts judges using a variety of well-accepted financial yardsticks. While your savings are insured and the percentage of banks with low ratings is tiny, avoiding D- or F-rated institutions could save you from hassles if you have to get your money in the event of default.
Strategy: I Want High Returns and Convenience in Exchange for Some Risk
Money market funds are good options as a secondary savings account or to hold a portion of your emergency money. They are offered by mutual fund and investment companies and currently provide returns of as high as 2.4 percent, according to the data company iMoneyNet.
Money market funds invest in debt: super-safe, short-term Treasury bills, plus short-term municipal and corporate debt (also known as "commercial paper"). While convenient to use if you also have a brokerage account, unlike savings and money-market accounts, they’re not insured.
“They’re low-risk, but there’s an incremental amount of risk over investing in high-yield savings accounts,” says Eric Bronnenkant, head of tax at Betterment, an online investment company based in New York City.
Roth says the best current deal in money-market funds is the Vanguard Treasury Money Market Fund, which is yielding 2.27 percent. Unlike corporate money-market funds, the fund is fully backed by the U.S. Treasury. It's also exempt from state income tax. But you must invest a minimum, $50,000.
For as little as $3,000, you could invest in the Vanguard Federal Money Market Fund, yielding 2.26 percent. However, you won't get an exemption on your state income tax, Roth notes.
While money market funds typically require a minimum deposit of $500 or more, there's no limit on how much can be deposited or withdrawn after that initial deposit, or how often you can make transactions. You can write checks, arrange for direct deposit, and in some cases use ATMs.
Check the net expense ratio, which should be well below 1 percent of assets. Investor shares of the Vanguard Prime Money Market Fund, for instance, charge 0.16 percent, or $1.60 cents per $1,000 invested. (The minimum initial investment is $3,000.) Compare expenses among money funds using the free Fund Analyzer sponsored by FINRA, the self-governing body of the investment industry.
Strategy: I'll Do Anything for the Highest Insured Yield
High-yield reward checking accounts offer a relatively high interest—currently as much as 5.09 percent APY—and are federally insured up to $250,000. But the community banks and credit unions that offer them make account holders jump through hoops. While initial deposits and minimum balances are either nonexistent or very low, you typically must make six to 12 debit-card transactions per month, arrange for at least one direct deposit monthly, and sign up for electronic statements. There may be other rules, too.
With these accounts you’ll get the top rate on high-yield checking up to a certain balance; above that limit, the interest drops sharply. Many such accounts, also called "rewards checking," limit their high rates to balances of $10,000 or less.
Consumers Credit Union of Illinois' Free Rewards Checking, for instance, has a current APY of 5.09 percent on the first $10,000 in savings and 0.20 percent to 0.1 percent after that. You also to join the credit union (for $5) and agree to receiving all-electronic documents. And each month you must make at least 12 debit-card transactions totaling $100; have $500 in direct deposits; and spend $1,000 or more with a CCU Visa card.
Tumin says some of his website readers report having a dozen or so such accounts at a time, each account holding just under the maximum to get the top rate.
“But if you don’t meet the requirements, you don’t get hit by a monthly fee,” Tumin says. “At the very least, this type of account is no worse than a free checking account.”
Strategy: I Don’t Need to Touch My Savings for Several Months or a Year
Treasury bills of a year’s duration were auctioned at about 2.6 percent two weeks ago. They carry an implicit insurance: They’re debt backed by the full faith and credit of the U.S. government.
The minimum purchase is $100. You buy the bill at a discount and get the full price when it matures. For example, $200 worth of 52-week bills would actually cost around $195. You can buy these bills through a broker, but to avoid a fee, buy directly from the Federal Government at TreasuryDirect.gov. Check latest rates here; to determine the interest you'll get, take the "Price per $100" in the last column and subtract it from $100.
Bronnenkant mentions a benefit of this type of investment: The interest is exempt from state and local tax. If you live in a state with both, Treasuries are an attractive option for your cash.
The downside? Because you buy Treasuries at a discount, selling a bill before it’s due means you won’t get all the yield you expected. “There’s more liquidity than with CDs but some potential loss,” Bronnenkant explains.
Certificates of deposit with terms of six months or more are easy to find with yields at 2.45 percent or higher. For one-year CDs, you can find APYs at 2.8 percent. These time-based accounts, available through banks and credit unions, are federally insured up to $250,000.
With rates rising, using a fixed-interest vehicle like a CD is only worthwhile if you have funds you want to keep super-safe for a specific use down the road—say, tuition for the 2019 fall semester, says Olivier Cornet, managing director of JSF Financial, a Los Angeles–based wealth management firm. “If, for instance, you know you’ll pay a tax liability in a few months, look at a CD with a maturity that matches that period, so you can squeeze in as much yield as possible,” he says.
Typically, you pay a penalty if you withdraw the funds before the end of the CD period. Some new CD designs let you withdraw your money without a penalty.
With the Fed raising rates, don’t assume that longer-term rates will rise. "Top economists have a horrible track record of forecasting those rates," Roth says.
A better strategy, he explains, would be to buy longer-term CDs from a bank that offers a small withdrawal penalty of six months' interest or less. For instance, he notes, Ally Bank is currently offering a five-year CD at 3.1 percent annually with a 5-month early-withdrawal penalty that amounts to 1.29 percent. If five-year rates rise and you withdraw after one year to reinvest at the higher five-year rate, you'll still have earned 1.81 percent for that first year. If you withdraw after two years, you'll have earned an average, 2.46 percent annually.
"You could pay a very small penalty to buy a new CD paying much more, he adds.
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