In its continued effort toward a 2% target inflation rate, the Federal Reserve announced its 11th federal funds rate hike on July 26. This 0.25% increase brought interest rates to a 22-year high.
In a recent press conference, the Fed’s Chairman Jerome Powell also suggested that the next meeting in September could involve another hike if economic conditions call for it.
While higher rates can mean trouble for borrowers, they benefit you as a saver, especially if you know where to put your money for the best returns. Take a look at these four high-earning options.
1. High-Yield Savings Accounts
Based on the July data from the Federal Deposit Insurance Corporation (FDIC), you might earn an average interest rate of just 0.42% with a regular savings account. High-yield savings accounts, however, can get you much better rates of 4% or higher.
You’ll often find the best annual percentage yield (APY) through online banks such as Ally or SoFi. But if the lack of a physical branch matters, you can shop around for accounts through local banks and credit unions.
In exchange for the higher rate, you might need to make a larger opening deposit than with a traditional savings account. Otherwise, the account functions like a regular savings account, including any transfer limits per cycle your bank sets.
2. Certificates of Deposit
A certificate of deposit (CD) is where you deposit your money for a set time — often three months to five years — and usually earn a fixed rate. You get the interest and original deposit upon maturity. However, you could withdraw the money early and pay a penalty.
The FDIC’s national average rates ranged from 1.11% to 1.72% depending on CD length. However, some financial institutions pay much better rates, especially with short-term CDs. For example, U.S. Bank offered a 4.95% APY on 11-month CDs, and Capital One offered a 4.85% APY on its 12-month CDs.
Choosing the right CD term and considering your need for liquidity is important. To balance liquidity and returns, you might look into how to use a CD laddering strategy.
3. Money Market Accounts
If you need flexibility for your savings, a money market account can provide that and an attractive yield. It operates similarly to a high-yield savings account except that you may get a debit card or write checks from the account.
While the FDIC showed a 0.63% national average rate for these accounts, you can do much better, especially if you make a large deposit. U.S. Bank listed a 4.50% APY with a $25,000 minimum balance, and Discover showed a 4.25% APY for account balances of at least $100,000.
Be aware that a money market account’s flexibility could hinder your earnings goal if you keep spending money from it. Also, consider any minimum balance requirements to keep your good rate.
4. Government Securities
Available through the TreasuryDirect website, Treasury bills (T-bills) and I Bonds can offer high returns. Since they’re from the U.S. government, they’re considered extremely secure investments.
Sold through auctions, T-bills come in $100 increments and pay a fixed rate. You can choose from maturity options of four to 52 weeks, and selling them early penalty-free is possible. The U.S. Department of the Treasury reported T-bill rates exceeding 5% in July.
I Bonds are savings bonds with an interest rate consisting of fixed and inflation-based portions. They come in electronic form starting at $25 and in paper form beginning at $50. While I Bonds have a 30-year term, you can cash them out after a year, though a penalty applies before five years. Through the end of October, the I Bond interest rate is 4.30%.
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