We all need to keep some portion of our savings in cash. Now, after decades of dismal returns cash may be king once again. You can finally expect to earn more interest on your safe money instead of sitting by and watching the value of your cash get eroded by inflation. As the federal reserve continues raising interest rates, the yields on interest-bearing accounts are also increasing. But the opportunities to earn higher interest vary depending on the bank and your time horizon.

This is a good time to talk to a fiduciary advisor and evaluate all the available options that can add value to your savings especially as the U.S. heads toward what many believe is the next recession. 

As always, the best choices for higher returns on your cash depends on how long can wait to tap into your savings. Assuming you’re sticking with a time horizon of less than three years, the winners for both safety-first and higher yields are FDIC-insured bank certificates of deposit, money markets, high-yield savings accounts, and/or short-term government-backed US Treasury bills where you can expect to earn interest of at least 2.00% per year without giving up liquidity. 

Traditional Bank CD’s Versus Online-Only Rates

If you have money that you don’t need to access for six months, a year or even three years you can put that money to work in a bank or credit union CD so it can start earning interest. The longer you can leave your money in a CD, the better interest rate you can get. You don’t have to commit to a long-term maturity date to get a decent return. For example, six-month CD’s rates at online-only  banks are hovering at around 2.00% APY and upwards of 4.99% APY for an insured three-year CD. One strategy for savers to maximize safe-money returns is to stagger your maturity dates to take advantage of both the higher yields on longer-maturity CD’s and the shorter-term CD’s for liquidity.

Consider that in January of 2022, the annual percentage yield (APY) on a one-year bank Certificate of Deposit (CD) was just 0.09%, according to Bankrate¹. Since the Federal Reserve has raised interest rates six times this year, the average rate for that same one-year CD is hovering at about 0.71% APY. 

Online-only banks and credit unions (with no branch offices) offer substantially higher interest rates. It’s not unusual to find online banks willing to pay a full percentage point higher than traditional banks. Some paying as much as 4.00% on a one-year certificate. It’s important to make sure that the online bank offering higher rates is FDIC insured. Online credit unions should be covered by the National Credit Union Administration which offers the same level of protection. 

High-Yield Savings And Money Market Accounts

Several online banks are also offering high-yield savings accounts earning close to 3.5%. If you have the cash to put into savings but want the flexibility to withdraw it if needed, the high-yield savings accounts offer more liquidity than a CD or other investment options. Many of these savings accounts also have no minimum balance requirements. When you’re shopping for higher rates be sure to compare compounding frequency as well as any account requirements or fees.

When you’re considering a high-yield savings account, again, since it’s your safe money, as with CD’s, make sure the bank is insured by the Federal Deposit Insurance Corporation (FDIC). FDIC protection covers losses up to $250,000 for each named account holder if something should go wrong with the bank where you keep your money. 

Money market accounts have the same flexibility as high-yield savings accounts, but the interest rates typically aren’t as high averaging 2.25%, and they may require higher minimum balances. Rates are expected to continue rising into 2023.

U.S. Treasury Securities

Since they’re backed by the full faith and credit of the U.S. government, securities issued by the U.S. Treasury are the world’s safest investment. However, until a year ago most Treasury securities offered interest rates well below 1%. But thanks to the Fed’s aggressive interest rate policies, Treasuries are now offering attractive interest rates. 

For example, you can now find short-term Treasury bills and longer-term Treasury notes offering interest rates well above 4%.

Another extremely popular Treasury choice in today’s high inflation environment are Series I Savings Bonds (I-Bonds). Their interest rates are tied to inflation, and are adjusted upward or downward every six months. For example, if you buy an I-Bond from now through April 30, 2023 you’ll earn 6.89%. However, it’s important to understand that if the Fed succeeds in taming inflation next year, interest rates for your I-Bonds will decline. 

The good news is that if this happens you can redeem your I-Bonds after owning them for a year. However, if you cash in before five years you’ll lose the last three months of interest.  

It’s also important to remember that, unlike other Treasury securities, you can’t purchase I-Bonds from an investment or brokerage account. They’re only available through TreasuryDirect, the U.S. Treasury’s securities marketplace. Keep in mind individual purchases of I-Bonds are limited to $10,000 worth a year.

You can’t purchase I-Bonds in your IRA either, which means that the income you earn from an I-Bond will be taxable when you cash them in. 

Tools to Help You Search For Higher Savings Rates

If you want to have your cash earning high interest but still be able to access it without penalties, then a high-yield savings account or money market account may be your best bet. 

With so many online banks offering high-yield savings accounts, searching for the one that offers the best rate of return can be frustrating. Instead of chasing around for the best rates, some websites such as Bankrate.com make it easier to shop for higher yields on bank CD’s. There’s also an online tool that can help save time. MaxMyInterest tracks interest rates offered by online-only banks which tend to offer higher rates money market accounts. These banks are FDIC-insured and the tool also suggests how you should allocate your cash among the different banks to get the best rates. The MAX website claims users earn up to 3.16% APY. However, you will be subject to fees to use it, but the fees are low.

Adjust Your Mindset, Not Your Risk Tolerance

Cash is your sleep-at-night money that you don’t want to risk. If you are worrying about how much you are losing on your stock investments during this downturn in the economy, keep in mind there are ways you can take rising interest rates and inflation and make it work in your favor so your money is actually building value rather than losing it.

Finding the right financial advisor can be challenging. Let Wealthramp help you find the right advisor who will help you with your personal financial needs and situation.

(1) https://www.bankrate.com/banking/cds/historical-cd-interest-rates/#twenty-twenty