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All Contents © 2017The Kiplinger Washington Editors
By Lisa Gerstner, Contributing Editor
| June 2014
If you need a safe place to park your money, you have a lot of options—as long as you don't expect much in the way of yield for now. Short-term interest rates will stay low for the rest of 2014. But depending on how the economy fares, they may start to rise in 2015. (See Kiplinger's Economic Outlooks for more on the status of interest rates.)
We've listed the top spots for eking out more interest on your savings, depending on your tolerance for risk and the length of time you can tie up your money. For deposit accounts, check sites such as Bankrate.com and DepositAccounts.com to find top interest rates at banks and credit unions in your area, which may be higher than the nationally available ones listed here.
For your emergency fund—at least six months' worth of living expenses—and any other savings that need to be safe and immediately available, look to accounts insured by the Federal Deposit Insurance Corp., such as money market deposit accounts (MMDAs). (Stay away from money-market mutual funds, which pay practically nothing and aren't insured by the FDIC.) The FDIC insures up to $250,000 per person per bank. That means combined deposit-account balances, including MMDAs as well as checking accounts, savings accounts and certificates of deposit, at a single qualifying institution for an individual account owner are insured for up to $250,000. Co-owners of joint accounts are insured up to $250,000 per person. (Credit union deposits are insured up to $250,000 by the National Credit Union Share Insurance Fund.) To see whether your money is fully covered by the FDIC, use the estimator at www.fdic.gov/EDIE.
Money market deposit accounts often provide checks or an ATM card for withdrawing cash or to use for purchases. You can also transfer funds electronically to or from a linked checking or savings account. You are limited to six transfers per month without penalty, not including cash withdrawals at an ATM.
You can earn 0.95% on balances of less than $250,000 through the Incredible Bank Money Market account (maintain a $2,500 balance to avoid a $10 monthly fee; the account does not provide a check card or paper checks). The free Sallie Mae Money Market account, which includes check writing, yields 0.90%, with no minimum balance requirement. And the AmericaNet Bank Mega Money Market account offers a yield of 0.90% on balances of up to $35,000 (0.50% on the portion of the balance higher than $35,000), and it comes with a Visa check card.
Like a money market deposit account, a savings account can be a good place to protect and grow your emergency funds (check whether your MMDA or savings account charges a dormancy fee). You can't write checks from savings accounts, but you are allowed to make up to six withdrawals or transfers per month. To transfer funds, you can link a savings account to a checking account.
The no-fee Salem Five Direct eOne Savings account yields 1% on balances of up to $500,000 and has no minimum balance (the minimum deposit to open an account is $100). The SynchronyBank Optimizer Plus High Yield Savings account pays 0.95% on all balances (but you need a $50 minimum balance to avoid a $5 monthly charge). Saving up to go on a big trip or meet some other goal? Check out SmartyPig. You set a savings goal and make recurring contributions to a free account that yields 1%. When you reach your goal, SmartyPig will turn off the recurring deposits; you can let the money sit or have it transferred back to the funding source, load the money onto SmartyPig's prepaid card, get retailer gift cards with cash-back rewards or choose some combination of the three.
If you can meet a few qualifications—which usually include banking online and using a debit card for purchases—think about getting a high-yield checking account. The amount eligible to earn the highest rate is usually no more than $25,000, and some of the best rates are available only to residents of the states where the bank does business. But a few banks open their accounts to residents of the entire U.S. Many credit unions require applicants outside their jurisdictions to make a donation to an affiliated charity. You can find insured high-yield accounts offered by community banks and credit unions at CheckingFinder.com.
Earn 5.09% on up to $10,000 with no minimum balance through the Consumers Credit Union (Illinois) Free Rewards Checking account . (You'll only earn tiered rates of 0.10% to 0.20% on any balance greater than $10,000.) Requirements to earn this rate include using your debit card 12 times monthly and spending $1,000 or more per month on one of the credit union's Visa credit cards. (Rates of 3.09% or 4.09% are available to those who meet less strict requirements.) Consumers Credit Union refunds fees from out-of-network ATMs. Lake Michigan Credit Union's Max Checking account yields 3% on up to $15,000, with no minimum balance, and it refunds up to $15 a month in surcharges from non-LMCU ATMs.
For money you can tie up for a few months or more—say, a portion of your emergency fund that you wouldn't need for at least three months, or money earmarked for tuition or retirement income—consider certificates of deposit. CDs come with maturities that typically range from three months to five years, with longer maturities offering higher yields.
It's best not to lock up all your cash in a long-term CD, especially with interest rates as low as they are. If rates go up, you want to be able to reinvest your money at a higher rate. Constructing a CD ladder—putting chunks of cash in CDs of varying maturities—allows you to reinvest cash from shorter-term CDs as they mature to take advantage of higher yields. Your longer-term CDs will continue to earn interest at today's highest rates. You can invest in a long-term CD even if you think you may cash out early or if you want to take advantage of rising rates—just be sure to check the interest penalty in advance to be sure it's not too onerous.
If you'd like to put more than $250,000 in CDs, the Certificate of Deposit Account Registry Service (CDARS) offers a convenient way to invest your funds. You deal with one participating bank, which sets the rate. A deposit-placement service that works with CDARS parcels out chunks of less than $250,000 (leaving wiggle room for accrued interest) to some of about 3,000 participating institutions.
Melrose Credit Union recently offered high rates on its one-, two- and three-year share certificates, yielding 1.15%, 1.41% and 1.66%, respectively. Each requires a minimum investment of $5,000. The GE Capital Bank one-year CD pays 1.10%, and it has a $500 minimum deposit.
U.S. savings bonds are another supersafe investment for money you can tie up for a year. You can cash in savings bonds after 12 months, but if you redeem them before five years have passed, you forfeit the last three months' worth of interest.
EE bonds pay a fixed rate. After 20 years, the Treasury will double an EE bond's purchase value if interest accumulation hasn't been sufficient to reach that point. The I-bond's rate is composed of a fixed rate that lasts for the life of the bond and a semiannual inflation rate that changes every six months.
EE bonds pay only 0.50%, but I Bonds have a decent yield of 1.94% (with a fixed rate of 0.10% and an inflation rate of 0.92%). An individual may purchase from $25 to $10,000 in I Bonds per year in an online Treasury Direct account, which you can set up at www.treasurydirect.gov.
If you're willing to forgo FDIC insurance, explore ultra-short-term bond funds. Some of them suffered heavy losses during the downturn in 2008 and proved to be more risky than expected. And as with other bonds and bond funds, when interest rates go up, prices of short-term debt securities go down. But because of the bonds' short maturities, substantial losses aren't in the cards. Much of your gains will be eaten up if expenses are high, so shop carefully.
USAA Ultra Short-Term Bond (symbol UUSTX), an ultra-short fund with no sales charge and expenses of 0.58%, is yielding 0.85%. Wells Fargo Advantage Ultra Short-Term Income Fund (STADX), which also has no sales charge, is yielding 0.84%, with expenses of 0.74%.
You can earn more than 3% in specialized WorldCurrency CDs from EverBank. The CDs, which have maturities of three to 12 months, invest in currencies of foreign markets—a three-month CD invested in the South African rand, for example, recently yielded 4.16% (there's a $10,000 minimum purchase). The CDs are FDIC-insured against bank failure, but you take on currency risk—you could lose principal if the U.S. dollar rises—so consider putting cash in a few different currencies to hedge against price fluctuations. The WorldCurrency Basket CDs ($20,000 minimum purchase), with a maturity of three or six months, invest in a mix of three or more currencies. The Global Power Shift CD, for example, invests equally in the Australian dollar, Brazilian real, Canadian dollar and Norwegian krone; the three-month CD recently yielded 2.25%.
With peer-to-peer lending platform Prosper, you can examine the credit quality of loans you make and create a diversified portfolio to minimize your risk. Although you can invest as little as $25, Ron Suber, president of Prosper, recommends investing a minimum of $10,000 to create a well-diversified portfolio of at least 400 loans. There are seven loan grades. Top-quality AA loans, which Suber equates to triple-B rated corporate loans, are yielding 4% to 5%; lower-quality loans pay higher rates. Residents of 30 states and the District of Columbia can invest in these loans, which have either a three- or five-year term.
Similarly, Lending Club facilitates loans between lenders and borrowers, and you can create a broad portfolio of loans. Investors could recently earn about 5% or more depending on the loan grade, and terms are for three or five years.
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