You’re sick of the pitifully low interest rates your local bank offers. But, unfortunately, other ways to save money might earn you more than 100 times higher interest rates.
Experienced investors know that the more the risk associated with an investment, the greater the reward. Therefore, the return (in the form of interest) you can anticipate from a bank savings account will be exceedingly low due to the account’s shallow risk. This is especially true in the current low-interest rate climate, where bank savings accounts can pay as little as 0.01% interest.
Why you should have savings despite everything
Savings accounts are not particularly wise investments from the perspective of return on capital. However, they are suitable investments due to other aspects as well. Any investing strategy should include having a cash reserve, which allows you far more flexibility. First, you don’t want to pass up a sudden, unanticipated opportunity to invest in a very outstanding business because you lack the funds. Second, having cash on hand for emergencies helps prevent you from using credit cards excessively in times of need, resulting in fees and interest payments that would offset any investment gains. Fortunately, there are other ways to store money besides traditional savings accounts at banks.
Online banks
Because online-only banks have lower overhead than traditional brick-and-mortar banks, they can often offer more excellent interest rates. In addition, they can give some of the money they save back to their clients as they don’t have to spend as much on maintaining physical branches. One well-known illustration of an all-online bank is Ally Bank. Other banks have adopted a mixed strategy, operating primarily online while maintaining a modest number of physical branches. Dime Community Bank has adopted the following stance: Although it has 27 locations in New York City, it services the entire nation as an online bank. Suppose you reside close to one of these hybrid banks. In that case, you may use the convenience of a physical bank location and a relatively high interest rate. The finest internet banks currently provide savings account interest rates ranging from 1.05% to 1.15%. Compared to other investment options, that return isn’t exactly stellar. Still, it is almost 100 times greater than many traditional banks provide.
Deposit Certificate (CD)
A bank delayed deposit, or CD, is similar to a savings account in that you cannot access the funds until the allotted period has passed (unless you choose to incur a penalty). A CD can have several months to many years, with longer terms often providing better rates of return. By dividing your resources among numerous CDs that mature at various times, you can boost the liquidity of these investments if you choose to utilise CDs as a substitute for a savings account.
For instance, if you invest $1,000 in a six-month CD every month, you will receive a portion of your investment back once the initial CD term expires. However, given the inconvenience of having your money tied up in a less liquid account and that the return on short-term CDs is only slightly more significant than the return on internet savings accounts, CDs are not a terrific savings-equivalent alternative in the current market.
Treasury securities
As a mechanism to lend money to the federal government and get interest payments, Treasury bills are the short-term equivalent of Treasury bonds. A Treasury bill is often purchased at a discount and paid out at face value at the end of the period. For illustration, you might pay $98 for a $100 treasury note, receive $100 when the period is up, and keep $2 as interest on the loan you made to the government.
Treasury notes have terms ranging from a few days to one year. The return on three-month Treasury bills is currently 0.78%, much lower than the return on internet bank savings accounts in recent months. One outstanding benefit of Treasury bills is that your returns are excluded from state and local taxes. Therefore, Treasury bills may be preferable to savings accounts if you reside in a state with high-income taxes.
MyRA
MyRA is designed initially to be a retirement account. Still, it also works well as a place to keep your money. MyRA is a particular kind of Roth IRA run by the government. Your contributions are put into the same type of security that government employees have in their retirement accounts through the Thrift Savings Plan: U.S. Treasury retirement savings bonds. In April 2017, the fund earned 2.375%, a fantastic return for a Treasury Department-backed asset. You can take money out of this Roth-style account whenever you choose, but you’ll be subject to penalties if you take money out of your earnings before age 59-1/2. Overall, it is a relatively excellent substitute for a traditional savings account.
Select the account you want to use.
The decision to deposit money into a savings account is the most crucial step. Use a traditional savings account if you don’t have the time or want to look into these options. But, again, you are doing it morally as long as you invest money.
