If you’re like most Americans, you are earning close to zero on deposits at the bank. Despite the fact that short-term interest rates are on the rise, most banks have left interest rates paid on deposits at record lows. As of January 2019, the average interest rate paid on savings accounts was only 0.09%, according to the FDIC. Fortunately, options are available for investors to earn significantly more interest on their savings.
1. Shop Around: Find a New Bank
While most banks are still paying minuscule interest rates, some have started to boost deposit rates to attract new customers. Online banks in particular have aggressively raised their deposit rates in recent years. Because online banks don’t have costs associated with brick and mortar branches, they can offer significantly higher yields on savings accounts. Several online banks are now paying over 2.0% on their savings accounts. Click here to browse attractive savings rates currently available to investors.
2. Consider Money Market Funds
After years of paying close to zero, money market interest rates have risen sharply in recent years. Money market funds are mutual funds that invest in a diversified basket of highly liquid, short-term fixed income securities. These funds offer daily liquidity and very low risk. Money market funds are currently paying above 2% on average. Money market funds are not bank products, however, and therefore are not FDIC insured. Despite this, the risk in these funds is extremely low.
3. Invest in CDs
Certificates of Deposit (CDs) are issued by banks and pay a fixed interest rate over a specified time period. Numerous one-year CDs are currently paying over 2%, and even higher rates are available for longer-term CDs. While these rates are much higher than most investors are getting at the bank, one downside to consider is that most CDs will have an early redemption penalty if not held until the maturity date. Therefore, CDs should only be used for the portion of your savings that you are comfortable locking up for a specified period. (You should always keep a portion of your savings in an “emergency fund” which you have daily access to. The team at Allegiant Private Advisors suggests 3-6 months of living expenses.)
4. Park It with Uncle Sam: Short-Term Treasuries
Treasuries are fixed-income securities that are issued and backed by the full faith and credit of the U.S. government, and considered essentially risk-free. Investing in short-term treasuries allows you to earn a significantly higher interest rate than at your bank, without taking on meaningful credit risk. As of early January, six-month and one-year treasuries were yielding 2.4% and 2.5%, respectively. Similar to a CD, these investments are best suited only for the portion of your savings that you will not need to tap in the near-term. However, unlike a CD, should you need the money prior to maturity, you can sell the treasury without any penalty—but the price will fluctuate, albeit minimally, daily. One bonus to consider when investing in treasuries for non-Florida residents: all interest earned on treasuries is exempt from state and local income taxes.
5. Choose Tax-Free Income with Short-Term Municipal Bonds
Municipal bonds are issued by state and local governments and are a great option for investors in higher tax brackets. While treasuries are exempt from only state and local taxes, municipal bonds are exempt from state, local and federal taxes. Many municipal bonds are best suited for a long-term investment horizon, but investing a portion of your savings in short-term, high-quality municipal bonds can be a tax-efficient, low-risk investment option. One-year, AA-rated municipal bonds are currently paying 1.75%. For an individual in the 25% tax bracket, this is equivalent to a taxable bond paying 2.33%. At a 35% tax bracket, the taxable-equivalent yield is over 2.55%. The higher your tax rate, the more valuable the income tax-free nature of municipal bonds is for investors.
These investments have varying degrees of liquidity and many are only suitable for cash that you will not need to access in the near-term. If you have questions about how these options may work for you, the Allegiant Private Advisors team would be happy to connect and start developing your customized wealth management plan.
Allegiant Private Advisors is located at 240 South Pineapple Ave., Suite 200, Sarasota, FL 34236. For more information, call 941-365-3745 or visit www.allegiantpa.com. Advisory Services offered through Commonwealth Financial Network, a Registered Investment Adviser.