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With fluctuating interest rates, you can secure a higher return for 2024 with a certificate of deposit or CD, Tumin said.
CDs pay interest for a specific period of time. Interest rates can be higher than savings accounts, but you'll typically face a penalty if you need the money before the CD's maturity date.
According to DepositAccounts, the highest average interest rate of 1% for one-year CDs is currently over 5.5% (as of January 4). But “the closer we get to the Fed cutting rates, the more CDs are going down,” Tumin said.
The closer we get to the Fed cutting interest rates, the more CDs are going down.
Ken Tumin
Founder and editor of DepositAccounts
According to Tumin, the average penalty for a one-year CD is three months of interest. However, early withdrawal penalties can be higher, so it's important to read the fine print.
If you may need the money in less than a year, you can opt for a penalty-free CD, which can “optimize returns without much hassle,” Tumin said.
Penalty-free CDs typically offer lower interest rates than traditional CDs, but you may be able to find one at your current bank with a higher interest rate than your savings account. Plus, there is no early withdrawal fee if you need the money before the due date.
Whether you're saving for short-term or long-term goals, Treasury bills or T-bills are “a great place for cash right now,” said certified financial planner Patrick Lach, founder of Lach Financial in Louisville, Kentucky. and assistant professor of finance at Indiana University Southeast.
T-Bills are backed by the US government and have maturities between one month and one year. They can be purchased through TreasuryDirect or a brokerage account. Interest is not subject to state or local taxes.
How to buy T-Bills through TreasuryDirect
1. Log in to your TreasuryDirect account.
2. Click “BuyDirect” in the top navigation bar.
3. Select “Bills” under “Marketable Securities.”
4. Select term, auction date, purchase amount and reinvestment (optional).
As of January 4, 1-month and 2-month T-bills were yielding about 5.4%. If you're in the 13% tax bracket in California, your after-tax return on these T-bills could be equivalent to a CD yielding 6.21%, Lach said.
However, T-Bills purchased through TreasuryDirect are not as liquid as cash in a savings account or penalty-free CD. If you want to sell T-Bills before maturity, you must hold the asset in TreasuryDirect for at least 45 days before transferring it to your brokerage account. You can find out more about the transfer process here.
Money market mutual funds are another “great option” for cash, said CFP Seth Mullikin, founder of Lattice Financial in Charlotte, North Carolina.
Money market funds, different from money market deposit accounts, are mutual funds that typically invest in short-term debt securities with lower credit risk, such as Treasury bills. While money market funds carry relatively low risk, your cash is not protected by the Federal Deposit Insurance Corporation.
According to Crane Data, some of the largest money market funds currently pay around 5.5% as of Jan. 4. However, money market yields “follow the Fed closely,” Tumin said. “So if they cut off, you can be pretty sure they’re going to drop off very quickly.”
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