The Federal Reserve has signaled that lower interest rates could be coming in the future, this has some Americans wondering if they should make changes to where their savings accounts are stored.
None of this news should cause anyone to make radical changes to where their life savings are being held, but if you have all or a significant amount of your money tucked away at a traditional bank where the interest can be as little as 0.01 percent, there are ways to find higher returns.
Right now some online banks are offering as much as 2.52% on savings accounts (individual bank restrictions do apply and interest offered varies from bank to bank.)
Some CDs are also being offered at greater interest rates. First Internet Bank, for example, is offering a 2.75 annual percentage yield on a 12-month CD with a minimum $1,000 deposit. There is a penalty for early withdrawal here though.
What About a Longer-Term Savings Strategy? Here are four savings goals many people have and a strategy for helping to make that possible.
Goal: To Have Security and a Maximum Interest on Money That is Accessed on a Regular Basis
Online Savings Accounts
Savings accounts held through online banks are currently offering yields of 2 percent and higher on an annual basis. These are some of the safest places to deposit money with up to $250,000 per holder federally insured. It is a very good idea to discuss these types of accounts with a financial planning advisor to help you navigate the rules and regulations of accounts and what might be the best account option for your personal needs.
Some limitations include a cap on the monthly withdrawals you are allowed to make before a fee is charged. Some accounts may have teaser rates that will drop lower after a certain amount of time.
Money Market Deposit Accounts
Money Market Deposit Accounts offer up to 2.5 percent right now. A money market account is similar to savings accounts, but they have some added benefits and a few extra restrictions. The difference here and reason for the higher interest is that the money is invested into secure, short term Treasury Debt. A plus side to investing money in a market account is they have more stable rates than savings accounts. Higher rate tiers (deposit of $10,000 for example) are least likely to change interest rates. Just make sure that the particular money market account has the features you need. Some accounts do not provide debit cards and check writing.
Goal: High Returns and Convenience Even if the Risk Increases Some
Money Market Funds
A money market fund can be a good choice for a secondary savings account or work as a smart place to tuck away a portion of your emergency funds. These are offered by mutual funds and investment companies. These funds invest in debts that are in the form of super-safe and short-term Treasury Bills as well as short-term or municipal and corporate debt sometimes called “commercial paper.” These accounts are not insured, so there is a low amount of risk involved.
Some accounts will offer backing from the U.S. Treasury, some are exempt from state income tax with a large minimum investment, some require a low minimum deposit but are not tax-exempt. There is no limit to the amount of transactions you can make with these accounts. It is good to shop around and see what different money market fund accounts offer.
Goal: To Have the Highest Percentage while Still Insured
High-Yield Reward Checking Accounts
High-yield reward checking accounts can offer as much as a whopping 5.09% APY while being federally insured for up to $250,000. The drawback here is that the community banks and credit unions that offer them also offer a large number of requirements and restrictions with them. Initial deposits and minimum balance requirements tend to be low, but you will have a required amount of transactions to make every month (between 6-12). An account holder must also make one direct deposit a month, sign up for electronic statements, and more depending upon the bank. These accounts will drop the interest rate when a specified amount is hit. For example, the rate may drop drastically once there is $10,000 in the account.
Goal: Not to Touch the Money in the Account for Several Months to a Year
Treasury Bills of one year’s time are being auctioned at around 2 percent interest. They carry an unstated by implied insurance in that they are debt-backed by the full faith and credit of the government.
These have a minimum purchase price of $100. You purchase it at a discount and receive the full price when it matures. So if you purchase $200 worth of bills it would cost $196. To determine the amount of interest you receive take the price per $100 and subtract it from $100.
The interest on these investments is exempt from state and local taxes, making it very attractive in some states. The downside comes if you need to sell a bill before it is due because you will not receive the full yield.
Certificate of Deposit (CD)
Certificates of Deposit with a term of 6 months or longer are easy to come by and offer 2.5% or higher. One year CDs can be around 3%. These are time-based accounts offered by banks and credit unions that are federally insured up to $250,000. These are a good investment if you are expecting interest rates to drop as the interest is fixed. The downside could be getting locked into a lower rate of interest rises.
The best financial savings plan goal or strategy is always to consult a professional that is well-versed in all of the current options.
Someone who has the main goal of listening to and understanding your goals and helping you to find the best options to make those goals a reality.
Our goal at Clarity Capital Management is to help you discover your goals and find a clear path to meeting them. For more information on the best savings plan strategies in Western Washington please contact us any time.