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Investors have many choices when it comes to saving for short-term goals, and high inflation and rising interest rates have made those decisions more complicated.
While there are signs of inflation slowing, the US Federal Reserve expects interest rates to remain higher.
“It looks like this year might be a little difficult,” said Ken Tumin, founder and publisher of DepositAccounts.com, a website that tracks the most competitive savings options.
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Although the Fed’s federal funds rate has reached its highest level in 15 years, interest rates on savings accounts have not matched those increases, Tumin said.
On Jan. 4, high-yield online savings accounts paid an average of 3.48%, according to DepositAccounts, with some smaller banks hitting 4%.
Still, if you keep money in a savings account, Tumin said it’s better to stick with established banks.
He warned savers to be “really careful” with financial technology companies that work with banks for checking and savings accounts and other cash products. “They should go directly to FDIC-insured banks and not through fintechs,” Tumin said.
It’s a “strange environment” for certificates of deposit
Another savings option, certificates of deposit or CDs, could provide opportunities for short-term savers, Tumin said.
“It’s a strange environment where we can actually get a higher rate for short-term CDs than long-term CDs,” he said.
It’s a strange environment where we can actually get a higher rate for short-term CDs than for long-term CDs.
Ken Tumin
Founder and Publisher of DepositAccounts.com
While Tumin expects savings account interest rates to rise, those rates may not match the one-year CDs, which have followed the Fed more closely, averaging 4.81% on Jan. 4, according to DepositAccounts.
“From that perspective, next year you might be better off with a year-long CD than with an online savings account,” he said.
Series I bonds remain a “good consideration” for short-term investors
As inflation has skyrocketed, Series I bonds, an inflation-protected and nearly risk-free asset, have also become a popular choice for short-term savings.
I-Bonds currently pay 6.89% annualized interest on new purchases through April, compared to the 9.62% annualized rate offered from May through October 2022.
“These have become very popular with our clients as interest rates have skyrocketed,” said certified financial planner Eric Roberge, founder of Beyond Your Hammock in Boston. “That makes them great considerations for shorter-term investors.”
I-Bonds earn monthly interest with two parts: a fixed rate that can change every six months for new purchases but stays the same after purchase, and a floating rate that changes every six months based on inflation.
While the current annual rate of 6.89% may be attractive, the yield may change in May based on six months of inflation data. Since you won’t be able to access the money for a year, there’s an opportunity to lock in a lower interest rate after the first six months.
However, if you need your money in one to five years, this could be an option to consider, Roberge said.