Cash has been a refuge during this volatile year when stocks, bonds, and cryptocurrencies have cratered—especially since savers can now earn some of the highest yields in more than a decade.
Interest rates on many high-yield savings accounts have risen above 3%, and yields on one-year certificates of deposit are 1.24% on average, the highest since May, 2009, according to Bankrate.com. With a possible recession looming for 2023, now is a good time to make sure you’re getting the most from your cash.
Those who keep all of their savings at a big bank are missing out. The national average interest rate offered by big banks is just 0.19%, according to Bankrate.com’s national survey of large lenders.
Unlike, say, credit card rates, bank account interest rates aren’t tightly correlated with the benchmark federal-fund rate, which the Federal Reserve is expected to raise by half a percentage point when policy makers meet next week for the last time this year. Instead, bank yields more closely reflect the institutions’ need to attract deposits. And big banks, flush with cash, have not had to work hard to attract money. Traditional institutions have also benefited from customer inertia: Since the start of 2019, Americans have lost out on at least $291 billion in interest by keeping their savings in the five biggest banks, The Wall Street Journal reported.
By contrast, online-only banks have had to compete for customers, and have steadily raised their rates this year. What’s more, online-only banks have lower overhead than big legacy banks with bricks-and-mortar branches, which also contributes to their higher yields. Most customers with a high-yield savings account also maintain an account at a big bank where they pay their bills and get their paychecks deposited.
There’s no single best way to maximize your cash. To get the most out of today’s high yields, consider customizing divvying your saving into separate pots, based on when you might need to access the funds. Then apply a different strategy for each:
Financial advisors generally recommend that savers keep between three and six months’ worth of expenses in an emergency fund. (Retirees should keep even more, around two years’ worth.) Having a cash stash will help you avoid taking on credit card debt or dipping into your retirement account in the event of a job loss or a big unforeseen expense.
A high-yield savings account is a good place to park your emergency cash. Keep in mind that some online-only banks don’t come with ATM cards—to withdraw your money, you can first transfer it electronically to your traditional bank account. That transaction could take between one and three days, so if you have an urgent need for cash you could put the expense on a credit card then pay it off after the transfer comes through, or you could keep a small cash cushion in a checking account for immediate access.
Certificates of deposit are a good option for savings goals with a fixed horizon, said Mark Hamrick, senior economic analyst for Bankrate.com. For example, say you’re priced out of the real-estate market, but you’re hoping that home prices will come down by next spring so you can try searching. Consider putting your down payment in a three-month CD. Or if you want to set aside money to buy next year’s holiday gifts, you could put that money into a 12-month CD.
Many brokerage firms offer certificates of deposit to their customers. The top rate on a three-month, new-issue CD through Fidelity is currently 4.35%, for example. These CDs are issued through banks, so FDIC insurance of up to $250,000 per account owner, per issuer, applies.
Brokered CDs come with some caveats, however: Some are callable, which means the issuer can call them before the maturity date and you’ll have to reinvest your funds at a lower interest rate. What’s more, if you end up needing your money before the CD term is over, it isn’t a matter of simply paying an early withdrawal fee, said Greg McBride, chief financial analyst for Bankrate.com Instead, your CD will get sold on the secondary market, and you could lose money. “You absolutely have to understand the terms before you commit your money,” McBride said.
You can also buy CDs directly from banks. These are simple contracts between the bank and the purchaser and are not callable, McBride said. Some banks offer CD yields that are competitive with brokered CDs.
Series I savings bonds are an option for longer-term savings. The current rate on I Bonds is 6.89%, which although lower than the previous rate of 9.6%, is actually more attractive if held for at least four years, since current I Bonds also come with a 0.4% annual fixed rate. I Bonds earn interest for 30 years, unless you cash them before then. These savings bonds can only be purchased through the government, either through the TreasuryDirect website or through your tax return.
Before you buy I Bonds, be aware of the liquidity and purchase constraints, said John Augustine, chief investment officer at Huntington Private Bank in Cincinnati. Individuals are limited to $10,000 in I Bonds per year, with an additional $5,000 in paper bonds allowed if purchased through your tax refund. You can’t redeem your bond in the first year after purchase, and if you redeem it in less than five years, you lose the last three months of interest.
Write to Elizabeth O’Brien at email@example.com