Making Your Money Last

3 Ways to Earn 1%-2% in Short-Term Accounts

As the Federal Reserve continues to raise rates, your cash is getting a better return. But inflation is still nibbling away.

Thanks to the Fed, cash is no longer trash. Yields on short-term fixed-income accounts and securities–typically meaning those maturing in one year or less–have tracked the Fed's key rate and now are mostly between 1% and 2%. And note: If the Fed sticks with its rate-hike plan, yields on bank savings deposits, money market funds, U.S. Treasury bills and other short-term accounts could be 1.25 points higher by the end of 2019 than they are today.

Earnings for All

 

 

The risks: There is little to no risk of principal loss on most short-term accounts. The main risk is inflation. The annualized U.S. inflation rate is about 2%, and until yields rise above that mark, cash in these accounts is losing purchasing power.

How to invest: One of the most popular short-term savings options is a money market deposit account at a bank. The average national yield is a mere 0.18%, but some banks recently paid as much as 1.8% on such accounts, says Greg McBride, chief financial analyst at Bankrate.com. So it pays to shop around. Federal deposit insurance is identical at every bank: It insures deposits up to $250,000 per depositor, per institution.

If you're willing to lock up your cash for one year, you can find banks paying as much as 2.2% on one-year certificates of deposit. But McBride says most savers are smart to stay liquid in money market accounts: "In a rising-rate environment, you want the ability to reinvest on a regular basis" at higher yields.

Banks' chief rivals for short-term savings are money market mutual funds. The average money fund yield was recently 1.3%, but some are paying significantly more. We like Vanguard Prime Money Market (symbol VMMXX, yield 1.8%). Though not federally insured, money funds are low-risk.

Finally, a super-safe option is U.S. Treasury bills. Six-month T-bills recently yielded 2%. You can buy them directly from Uncle Sam at www.treasurydirect.gov. Residents of high-income-tax states will appreciate that states don't tax U.S. Treasury interest income.

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