Image: Courtesy of Unsplash (www.micheile.com)
We have not seen interest rates this high on “safe” investments for 15 years
By Jon Aldrich
What are you waiting for? Anytime I hear I can make hundreds or maybe thousands of dollars for a few minutes of work, I am jumping at the chance. But a lot of you are passing up this opportunity to earn some real money on your cash and savings accounts and all it takes is a few minutes of work. What is the holdup?
With Jerome Powell and the Federal Reserve bent on taming inflation they have been steadily raising interest rates to slow down inflation and try to cool the economy at a pace we have not seen in over 40 years. It has created opportunities for savers that have not existed since 2007 and before. It has really been a long time since we have seen such attractive savings rates.
We have become so accustomed to earning nil on our cash and savings over the last 15 years or so since the Great Recession that a lot of us have become complacent on making sure our cash is working for us. I see it time and time again with clients and people I talk to when the subject of the markets and investing come up. Often, I may say while I am not all that excited about the stock market for the next several months, I am excited about earning some real interest on “safe” investments and cash for a change.What do I consider safe investments? I am thinking of your cash that may be sitting at a local bank still earning next to nothing as most banks do not have all that much incentive to offer attractive yields on your cash since they have all the deposits they need. In fact, according to the data company, S & P Global, the average bank savings account is earning a microscopic 0.09% interest rate as of mid- November. In my mind, that almost borders on criminal when the Federal Reserve has raised short-term interest rates to almost 4% and will likely be up over 4% soon as they continue to raise rates in December and early in 2023.
Those of you that I have spoken with over the last several months have heard my rants about getting proactive and earning some interest on your cash. Yet, I still see a lot of cash sitting and earning next to nothing when with just a few minutes of work you can earn a nice return on your time. For instance, say you have $25,000 just sitting at your local brick and mortar bank or in your checking account. Over the next 12 months that would earn you a paltry $25 of interest. Sure, you might be able to order a pizza or a couple of McRibs with that windfall, Congrats! But, say you can earn 4% on that same $25,000 with no risk over the next year, you would net $1,000 of interest. If you do the math on the time spent to do this, it winds up being a really nice hourly rate!
Also, I am referring to cash used for emergency funds or a cash buffer, saving for a particular goal or funds you are not sure what they will be needed for, but there is a chance they will be needed in the next couple of years or earlier and you don’t want to take any investment risk for larger returns.
So, let’s refresh your memory as to ways you can earn a much higher rate of return on your cash with no risk:
Online FDIC Insured Banks Accounts:
Many of my clients are already using online banks such as Ally, Discover Bank, Capital One, Goldman Sachs or others to get a higher interest rate while still having your cash protected by FDIC insurance as long as your balance is kept under $250,000 per person at an institution, thus joint accounts can have up to $500,000 of protection. Most of these online banks do not have minimums, although there sometimes are more attractive rates for larger balances. They are easy to set up and it usually just takes a couple of days to transfer funds between the online savings account and your regular bank. There are usually no minimum (or low minimum) balances and fees are minimal.
Chart shows the rise in short-term interest rates that is creating great rates for cash
You can also use a site such as NerdWallet to search for the highest yielding banks and whether they are FDIC insured. I did a quick search with this and was amazed at how many online FDIC banks are out there and if you do some digging you can find some differences in rates. For example at the time of this writing, most of the major banks I mentioned earlier (Ally, Capital One, etc) are all paying about 3% on their high yield savings, but on the NerdWallet search I found an FDIC insured bank called BrioDirect which is paying 3.75% on deposits. You can also see user reviews and other ratings from NerdWallet to see if it is worth exploring some of these lesser-known banks to earn some more yield.
I have pounded the table for the last year or so about what a no-brainer purchasing I-Bonds is. Even though I-Bond rates have dropped a bit to 6.89% through April 30, 2023, you are still not going to touch a rate that high for guaranteed, safe money. Of course, you do need to leave it there for one year before touching, and between years 1 through 5 if you take it out, you lose 3 months of interest, but even with that possible penalty it is a rate higher than any other safe investments out there. Remember, I-Bonds are issued by the U.S. Treasury and backed by the full faith and credit of the United States. If these go bad, we have much bigger issues, and you are going to want to have ample stocks of Bread, Booze and Bullets. (One caveat, though is that with all the popularity, I hear from people that the website can sometimes get bogged down and make it difficult to accomplish purchasing these, although I have never had any issues doing so personally).
Certificates of Deposit (CDs):
CDs are coming out of mothballs as well lately and the online banks mentioned above have CDs to invest in also, and a quick look at Ally’s offerings show 12 month CDs at 4.0% and 3 year CDs at 4.1%. I compared this to my local brick and mortar bank (we will not mention their name) and they were pretty proud of their 12 month CD paying 0.80% and a 2 year paying 1.15%. That sure sounds like a great deal compared to Ally, right? Many of the other local banks were so embarrassed of their rates that you have to call them to get the rate, since they don’t show on their website. Remember, this would be for cash that is not needed until the time of CD maturity.
Brokered CDs on Schwab and Fidelity:
You can also purchase FDIC insured CDs directly from brokerage accounts at Schwab and Fidelity and get attractive rates as well. I did a quick check at Schwab and saw that they had one year CDs paying 4.8%, 3-year @ 4.4% and 5 year @ 4.05%. You do want to make sure you purchase non-callable CDs if you go this route. You can get a bit of a higher rate by purchasing a “callable” CD but this just means the bank can “call” the CD early or pay you back your money before maturity whether you like it or not if rates drop. Remember, this would be for cash that is not needed until the time of CD maturity.
I am a big fan of U.S. Treasuries, but they can be a little more complicated to buy if you are not used to doing it. These can be purchased through brokerage accounts at places like Schwab and Fidelity as well as the Treasury Direct site where I-Bonds are purchased. Right now the rates are very similar to CD rates I mentioned earlier. The advantages are that you can buy unlimited amounts and not worry about FDIC insurance, the disadvantages are they are a little more complex to purchase if you have not done it before.
Other Alternatives that are not Risk-Free:
I am only mentioning absolute risk-free investments in the above examples. You can also earn some decent interest on certain intermediate-term annuities called MYGAs or multi-year guaranteed annuities, but now you do introduce the low risk of the insurance company not being able to make good on the payments in the future. So, sure, MYGAs are a very low risk investment, but a risk nonetheless that needs to be mentioned that the other options mentioned above do not have. You can find MYGAs generally with terms anywhere from 3 to 10 years. I have seen some 3- year rates @ 5%- and 5-year rates up around 5.5%. These can be a good tool under the right circumstances, but probably not for those that want an absolute guarantee on their cash.
As you can see, we now have opportunities to earn some real interest on safe, guaranteed cash investments that we have not had in over 15 years. However, it may take just a little bit of legwork to get these rates as most brick and mortar banks are not going to be able to touch the rates you can earn on these other savings vehicles. With the additional interest you can earn, the work will be worth it.