Best Ways to Earn Interest

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With stock market volatility, cryptocurrency prices falling steadily, and rising inflation making everything more expensive, many investors are wondering if there is a better way to put their money to work without the risk of losing money.

For some, that means going back to basics: deposit accounts with interest and government bonds, which are seeing higher yields as the Federal Reserve raises interest rates and financial institutions follow suit.

“There’s a lot of uncertainty in the markets right now, so it makes sense for some people to look for relatively stable ways to earn interest,” says Kevin L. Matthews II, a former financial advisor and founder of the Building Personal Education website. Pan. “We haven’t seen this kind of rate hike in a long time, so savers have the potential to benefit from the current climate.”

If you’re looking for a small boost to your savings or are looking for a fairly safe way to get a little more out of your portfolio, here are some of the best ways to earn interest next year with little risk.

High performance savings accounts

Savings accounts are known to have low yields, according to Anthony Carlton, CFP, vice president and wealth advisor at Farther. However, thanks to recent Federal Reserve rate hikes, account yields are on the rise.

“These are not the same types we saw before the stock market crash of 2008, but they are on the rise,” says Carlton. “They’re likely to go up more, so it’s good to see for a lot of savers.”

The national average yield on all savings accounts is 0.07%, according to data compiled by the Federal Deposit Insurance Corporation (FDIC). However, a high-yield savings account, which offers much higher interest rates, can offer an annual percentage return (APY) of up to 1%, depending on the institution. In general, high-yield savings accounts are associated with online banks and credit unions, as opposed to more traditional banks.

When looking for yield, Carlton suggests paying attention to banks and credit unions that offer an annual percentage yield of at least 0.50% and omitting physical institutions that offer standard savings accounts with much lower yields.

When choosing a bank or credit union to open a savings account, make sure that the financial institution is insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA) so that your deposits are protected in case of a bank failure. You should also try to find a savings account with no monthly fees or minimum balance requirements.

High performance current accounts

Current accounts are bank accounts designed for regular, day-to-day transactions. They are more liquid than savings accounts, as there are no limits on monthly withdrawals and allow easy access to your cash through debit cards and check writing privileges. Traditionally, savings accounts are limited to six withdrawals per month, although that rule was suspended in 2020. However, it could be reinstated, although there is no explicit timetable.

Because they are more affordable than savings accounts, current accounts tend to perform poorly. The national average of current accounts with interest is 0.03%, according to the FDIC, although there are some that offer returns above 1%. However, you are more likely to find high-yield current accounts with interest rates between 0.10% and 0.25%.

“A lot of high-yield checking accounts, like high-yield savings, put a lot of conditions on you to get the best rates,” Matthews says. For example, you may have to keep a minimum balance or have a certain number of direct deposits in your account each month. There may also be account-associated fees.

“But if you can get a little extra income from an account that you use regularly, it may make sense to put your money to work for you,” adds Mathews.

CDs and CD Stairs

Certificates of deposit (CDs) also offer higher interest rates than those seen in recent years. The national average yield of a one-year CD is 0.21%, while the national average rate of a five-year CD is currently 0.39%. However, different financial institutions may offer higher CD rates, depending on how much you are willing to keep on the CD.

One strategy to take advantage of the rate hike is to build a CD ladder, according to Parker West, vice president of strategy, analysis and pricing for the Savings Products Division of the Federal Navy Credit Union. With a CD ladder, split your money into CDs with different due dates. When the short-term CD reaches maturity, you use the money to buy a long-term CD and take advantage of the current rate, which may be higher.

However, the main drawback of this approach is that the money is less liquid, as it faces a penalty for early withdrawal when withdrawing money before maturity.

“People are getting more and more comfortable with blocking some of their money,” West says. “Over the last two years, a lot of people have extra money from the stimulus [payments] and because spending went down during the pandemic. Now they have something extra [cash] and could afford to put it in a less liquid account. “

Money Market Accounts (MMA)

A money market account (MMA), not to be confused with a money market mutual fund, is sometimes seen as a hybrid between a savings account and a current account. You have access to check writing and debit card transactions, but you are still limited to six withdrawals a month during normal time. In general, MMAs offer staggered interest rates based on their balance. As with savings accounts, during this time when the withdrawal limit is suspended, some financial institutions may still charge additional fees if the withdrawal limit is exceeded.

“Some people like the idea of ​​moving money to money market accounts because the rates are higher, but there’s more flexibility than with a CD,” West says.

The national average interest rate for MMAs is 0.08%, according to the FDIC. However, as with other accounts, you may find better performance when you visit different institutions (or online banks) and may maintain a higher balance. Many MMAs offer interest rates around 0.80%, which can be appealing to some consumers who want an account that offers convenience in transactions while providing a higher return than a normal savings account.

Government-backed bonuses

Government-backed bonds are considered long-term bonds, as opposed to T-bills, which are short-term bonds with maturities of less than one year. The bonds may seem quite appealing to some investors right now, according to West.

“Historically, Treasury bonds have offered fairly low yields,” says West. “However, I bonds are especially attractive right now with a yield of over 9%. Long-term savers like EE bonds guarantee twice the face value if you keep them for 20 years. You’re blocking your money, but it comes with a long – term warranty “.

When buying government bonds through Treasury Direct, experts like West and Matthews generally focus on I bonds and US savings bonds. They offer a guaranteed level of return and are backed by the U.S. government, which means many investors consider them among the safest in the world.

  • links I they are bonds linked to inflation with two parts to the interest rate. The first part is a fixed rate, while the second part is a variable rate linked to inflation. Interest rates are set twice a year. The current yield on an I bond purchased in May 2022 is 9.62%.
  • US Savings Bonds they have a fixed rate, depending on when you purchase them. For US savings bonds purchased in May 2022, the fixed rate is 0.10%. However, if you keep the bond for 20 years, you will receive twice the face value.

Both US savings bonds and I-bonds must be held for at least one year before they can be collected. If you charge them between one and five years, you will lose the last three months of interest as a penalty. If you charge them after five years, there is no penalty.

Professional advice

Remember that I bonds can be attractive now, but the rate is only good for six months at a time and the yield could fall sharply if inflation falls.

“It’s important to be careful to get excited about I-bonds right now,” Matthews warns. “You’re limited to $ 10,000 a year in purchases and the rate changes every six months. If inflation goes away, so does performance. But these can still be good investments for someone who wants to protect part of their portfolio from inflation.”

Treasury bills

Treasury bills, or Treasury bills, are sold at auction and are considered short-term investments. You can buy them with maturities of four, eight, thirteen, twenty-six and fifty-two weeks. Auctions are held weekly, except for 52-week maturities, which are held every four weeks.

When you buy Treasury bills, you usually buy them at a discount on the face value or declared value of the invoice. For example, you can buy a $ 100 bonus with a 26-week maturity for $ 96. When that invoice expires, you receive $ 100. The $ 4 profit is considered your interest.

Understanding the yield can be a bit tricky, as the Treasury indicates it as the “coupon equivalent”. Basically, this is a term that allows you to compare what performance could be if the bond were a bond. Here are some recent equivalent coupon ranges from recent auctions:

  • Four weeks: 0.39% – 0.67%
  • Eight weeks: 0.68% – 0.79%
  • Thirteen weeks: 0.91% – 1.03%
  • Twenty-six weeks: 1.45% – 1.48%
  • Fifty-two weeks: 1.97% – 2.07%

It is important to note that the maturities of twenty-six and fifty-two weeks have been moving inversely to the shorter terms. With those longer maturities, the coupon equivalent has gone down in recent weeks, compared to the shorter terms, where it has gone up.

“For short-term money, it may make sense to put it in a Treasury bill,” says Carlton. “That short-term note can turn around faster as interest rates go up. If you get a 20-year bond, you could be stuck.”

Bottom line

For some, it might make more sense to consider paying off high-interest debt, rather than looking for a return, according to West.

“Emergency savings and retirement savings are key,” he says. “Once you have the basics, instead of strengthening those accounts, you may want to explore whether you should pay off that high interest debt, which will only get more expensive as rates go up.”

After all, Matthews suggests considering your own risk tolerance and need for liquidity before blocking money in the name of interest.

“We’re in an interesting situation right now, and it’s tempting to lock your money into something safe with an attractive return,” Matthews points out. “However, don’t forget to look at stocks if you have a long time horizon. Now may be a good time to buy additional stocks, especially if you don’t need that money for more than a decade.”

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