Savers poised for profits as inflation falls. Where to put your money now
Xavier Lorenzo | moment | Getty Images
With interest rates rising, 2023 seems to be a good time for savers looking to make more money from their money.
The Federal Reserve added a 0.25 percentage point rate hike last week, the latest in a series of rate hikes to combat record-high inflation.
With the unemployment rate hitting a 53-year low in the latest jobs report, further rate hikes are expected. The next hike could come in March, according to Greg McBride, chief financial analyst at Bankrate.com.
“The benefit to savers isn’t just that interest rates go up,” McBride said. “Your biggest gain in 2023 will come from the fall in inflation.”
As high prices ease, the post-inflation bullion return should be much better this year than it has been in recent years, he said.
When it comes to deciding where to invest their money, savers have several options.
Online savings rates hit 15-year high
Primis Bank’s online savings account last week became the first to surpass 5% in recent years, with a 5.03% Annual Percentage Return.
“It’s been exactly 15 years since we saw 5% in a savings account,” McBride said in February 2008.
As interest rates rise, more savings accounts will reach — and surpass — that 5 percent mark in the coming months, McBride predicts.
“Every day we see the bar being raised and more banks increasing their payouts,” McBride said.
If you already have an online savings account, it pays to be vigilant and check the Annual Return Percentage, or APY, you’re currently receiving.
Online savings accounts tend to pay the highest interest rates, with rates like 4% or 4.5% becoming more common. However, the national average for stationary accounts is 0.33%. Outdated online savings or money market accounts may be tied to lower rates, even if the same institution raises rates on newer accounts.
The solution could be to simply transfer your money to a newer account, McBride said.
Because online savings accounts tend to offer more flexibility in accessing your cash, they’re a great place to put money you need for emergencies.
‘Now is the time’ to secure longer-term CDs
Interest rates on multi-year certificates of deposit have risen to around 4.5% but are unlikely to rise much further, according to McBride.
“If you’ve been waiting to grab one of the longer-term CDs — three-year, four-year, five-year CD — now is the time to take that step,” McBride said.
With some pundits predicting falling interest rates in 2024, longer-dated CDs now have an edge, noted Ken Tumin, senior industry analyst at LendingTree and founder of DepositAccounts.com.
“If interest rates are falling, now is the time to hold them,” Tumin said.
One- and two-year CDs offer interest rates in the upper 4% range — from 4.6% to 4.85% — and are likely to hit 5%, according to McBride.
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Capital One recently became the first major online bank to offer 5% off an 11-month CD, Tumin noted.
Six-month CDs offer interest rates comparable to liquid savings accounts, McBride said. However, unlike savings accounts, the return on CDs is guaranteed.
“A lot of retirees rely on interest income on CDs, and you’re finding the best returns you’ve seen in 15 years,” McBride said.
CDs are also ideal if you have specific future cash needs, like a wedding that’s a year away or college tuition that’s due at the same time each year, and the offerings fit your schedule, McBride said.
Note that CDs require you to hold your cash for a period of time and you will likely face penalties if you withdraw the money earlier.
Series I bonds have ‘become a better deal’
Series I bonds are inflation-linked savings bonds issued by the government.
The current interest rate for Series I bonds is 6.89% by April 30th on new purchases, which is significantly lower than the 9.62% rate offered last year.
Despite that higher rate, the fixed portion of the return over the past year has been zero, McBride noted. However, the fixed share is currently 0.4% and remains the same after the purchase. (The variable portion of the rate changes every six months based on inflation.)
“I-Bonds have actually become a better deal even though interest rates are down because you have the opportunity to increase your purchasing power,” McBride said.
A package of US five dollar bills is inspected March 26, 2015 at the Bureau of Engraving and Printing in Washington.
Gary Cameron | Reuters
I-Bonds come with limitations that make them less flexible than other options for your money.
For starters, there is generally a $10,000 per person per year limit on I Bond purchases. (You can use your tax refund to buy an additional $5,000 in Paper I Bonds.)
You must hold the money in the I-Bond for at least a year. If you redeem the I-Bond in the first five years, you lose three months of interest, McBride said.
As a result, I-Bonds may not be the best place for your emergency savings. But they can be a form of tax-deferred savings that you hold on to for years, or an addition to your broader portfolio, McBride said.
Money markets, treasuries are also worth mentioning
Money market funds, which pay out nearly 4%, are also a “great place to park your money in your brokerage account,” according to McBride.
Vanguard’s sovereign money market fund is currently offering an interest rate of 4.4%, Tumin noted.
While money market funds tend to be very liquid, they don’t offer this same FDIC (Federal Deposit Insurance Corporation) protections as savings accounts, Tumin noted.
Additionally, Treasuries are paying yields not seen in many years, with short-dated Treasuries yielding around 4.5%, McBride said. That could be an attractive option if you’re looking to increase your exposure to fixed income, he noted.
Because treasuries are generally exempt from state and local taxes, they can improve your money’s after-tax performance, Tumin noted. However, these investments are typically not as liquid as savings accounts.
https://www.cnbc.com/2023/02/06/savers-poised-for-gains-as-inflation-falls-where-to-put-your-cash-now.html Savers poised for profits as inflation falls. Where to put your money now
