An annual survey by the Federal Reserve shows millions of Americans live paycheck-to-paycheck and lack the funds to pay an emergency expense. But if you have been able to tuck some cash away you may be looking for a place to put it.
Until recently bonds and certificates of deposit (CD) paid almost nothing but that has changed in recent months as the Fed has begun raising interest rates. So, what are your options?
The experts we consulted say there are currently three attractive options:
CDs
Money market funds
U.S. Treasury bonds
Andrew Boyd, a financial adviser at Finty, says a high-yield savings account is now a very good place to park cash. After paying less than 1% for more than two decades some of these accounts pay more than 4%. And the money is FDIC insured up to $250,000.
Money market accounts
“Money market accounts can be another attractive option,” Boyd told ConsumerAffairs. “They often offer check-writing privileges, which can make your cash more accessible.”
Money market accounts are offered through financial institutions and are also FDIC insured up to $250,000. While you can access your money most funds limit the number of transactions you can make.
“Money market funds can generate different returns, depending on how they invest, but the value per share is fixed,” said Patrick Wells, portfolio manager at Pinnacle Associates. “Each share will receive this amount back, whether you need the funds tomorrow or next year. There is stability in the principal amount, but the returns might vary as the holdings mature and are reinvested.”
Young Pham, a financial expert and investment analyst affiliated with BizReport, a business and finance publication, says CDs can be an attractive place for cash if you don’t need the money for a while and think rates might soon start to decline. Even if rates fall, your interest rate is locked in.
“So, for example, a bank could offer a CD that lets you lock $10,000 in an account for a period of, say, seven years and earn an interest rate of around 5% per annum,” Pham told us. “In essence, you will be paid $500 a year in interest, and when the seven years elapse, you get your $10,000 back. CDs are considered a low-risk vehicle, especially if you choose banks or credit unions that are covered by the FDIC. This means that even if the bank was to go under, you still get your deposits back up to $250,000.”
Treasury notes
U.S. Treasury bonds also offer an attractive option, backed by the “full faith and credit of the U.S. government.” Tim McCarthy, co-CEO and chairman at marketGOATS, says the current environment is attractive because you don’t have to tie up your money for five to 10 years.
“Given that the yield curve is inverted – meaning committing long term gets an investor no higher interest than short term treasuries – I can understand why many investors are choosing to remain in shorter durations, such as one to three years. So, it can make sense to leave a significant portion in this category, especially if you think you want the flexibility to change your mind.”
Interest rates and bond yields can fluctuate daily so it calls for some research before deciding where to put the money. A good place to start is ConsumerAffairs’ guide to CDs, which identifies some of the most attractive current offerings.