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All Contents © 2020The Kiplinger Washington Editors
By John Waggoner, Contributing Writer
| October 31, 2018
For nearly a decade, savers have kept pictures of Federal Reserve Board members on their dartboards: The Fed brought interest rates to record lows after the financial crisis of 2008, but it has been raising interest rates since December 2015. Kiplinger projects another hike in December and at least three more in 2019. You’ll hear cries of anguish from borrowers and bond investors, but savers will be doing a happy dance. Here are seven ways to cash in on cash.
These days, there’s little difference between bank money market deposit accounts (MMDAs) and savings accounts: Both allow six withdrawals a month, but money market accounts often come with check-writing privileges. Both are insured by the Federal Deposit Insurance Corp. 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 up to $250,000. 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 their electronic deposit insurance estimator.
Savings: MySavingsDirect offers a yield of 2.25% and no minimum. You can earn 2.15% at CIT Bank, but you must deposit $100 a month or $25,000 to start. There are no fees and no check-writing privileges.
Money market account: MemoryBank, an online division of Republic Bank and Trust, offers a 2.25% yield on its MMDA; Western State Bank offers 2.25% as well.
Money funds are mutual funds that invest in Treasury securities, jumbo certificates of deposit and other short-term, high-quality investments. Unlike most mutual funds, they try to keep their share price at $1, issuing additional shares instead of interest payments. Unlike bank money market accounts, whose rates are set by the bank, money funds can only give you what they earn through their investment, less expenses. As interest rates rise, your returns will rise, too. (The reverse is true when rates fall.) Also unlike bank money market accounts, money market funds are not insured, although instances of money fund share prices falling below a dollar -- breaking a buck -- are extremely rare. Most money funds offer checking, much like bank accounts.
Money funds with rock-bottom management fees typically have the highest yields. Vanguard Prime Money Market (symbol VMMXX) charges 0.16% a year in expenses and currently yields 2.22%.
Time deposits offer you a bit more interest than demand accounts, such as MMDAs, because you lock up your money for anywhere from one month to five years. The typical early withdrawal penalty for CDs that mature in one year or less is three months’ interest; for CDs with longer maturities, the penalty can be as much as six months’ interest. (Those penalties are tax-deductible.) How long a maturity should you choose? “Right now, one or two years is the sweet spot,” says Greg McBride, chief financial analyst at Bankrate.com. “With interest rates rising, you run the risk of being stuck in a yield that won’t look that appealing 12 months down the road.”
1 year: North American Savings Bank offers 2.74% on its one-year CD, which has a $5,000 minimum investment.
2 years: VirtualBank 2.96% with a $10,000 minimum.
U.S. Series EE savings bonds are guaranteed to double in value -- provided you’re willing to wait 20 years. 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. I Bonds pay a fixed rate, plus a semiannual rate tied to changes in the consumer price index. Interest on both EE and I Bonds are free from state and local taxes, and you may be able to exclude interest from federal taxes if you use the proceeds for qualified education expenses. The IRS spells out the rules here.
EE bonds pay only 0.10% in their first six months, but the Treasury promises that your money will double in 20 years, which works out to a 3.5% yield. I Bonds have a fixed rate of 0.30% plus a semiannual inflation rate of 1.11%, for a combined annualized rate of 2.52%. (Rates change annually on November 1.) You can purchase savings bonds in denominations of $25 to $10,000 through an online Treasury Direct account, which you can set up at www.treasurydirect.gov.
The U.S. Treasury offers short-term bills, with maturities ranging from a few days to one year. Treasury bills are sold at a discount to face value: You might purchase a one-year, $10,000 T-bill for $9,800, for example. When it matures, you get $10,000, and the $200 is your interest. Your yield is 2.04%, or $200 divided by $9,800. Like all Treasury securities, interest is free from state and local income taxes, but not federal income taxes. The government guarantees interest and principal. All bills except one-year T-bills are sold at a weekly auction. The Treasury auctions one-year bills every four weeks.
A three-month T-bill currently yields 2.34%, and the maturity is short enough that if the Federal Reserve pushes up rates in December, you’ll get a higher rate when the current T-bill matures and you buy a new one. You can buy T-bills for free through Treasury Direct.
Treasury notes mature in two to 10 years and pay interest semiannually. You must hold your T-note to maturity to guarantee that you don’t lose money. If you sell before the T-note matures and if interest rates have risen since you bought the note, you’ll lose money because your older, lower-yielding note will be worth less in the secondary market. The government typically sells Treasury notes once a month.
Two-year notes are the best deal currently for these government-guaranteed investments: They yield 2.92%. You only pick up 0.28 percentage point if you buy a 10-year T-note.
These bond funds have maturities of two years or less, which means they have relatively low sensitivity to changes in interest rates. But their yields are higher than those on money funds. Although the fund’s share price will decline if interest rates rise, they are unlikely to fall hard. It’s important to keep expenses low. With rates at these levels, you can’t afford to give away much yield.
Vanguard Ultra-Short-Term Bond Fund (VUBFX) charges just 0.20% in expenses. Yield: 2.55%. The fund’s only losing quarter has been a 0.10% loss in the fourth quarter of 2015.