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.
We've listed the top ways 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.
1. Money Market Deposit Accounts
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.
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.
2. Savings Accounts
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.
3. High-Yield Checking Accounts
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.
4. Certificates of Deposit
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.
5. Savings Bonds
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.
Savings Bonds are backed by the full faith and credit of the U.S. Government, but are not bank deposits and are not FDIC insured.
For more information on First Republic's offerings, please contact us.
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The views of the authors of these articles do not necessarily represent the views of First Republic Bank.