What to do with your safe money
Interest on bank accounts has been close to zero since the Great Recession. Now amid the COVID-19 pandemic, bonds have joined bank accounts in paying very little. The yield on the ten-year US Treasury is 0.70%. Yes, that’s right. You have the privilege of lending Uncle Sam your hard-earned money for 0.70% per year. Throw in the possibility (a reasonably good one) of risking your principal if inflation comes back even slightly, and you might be wondering what your options are. What are you to do with your safe money – money that you don’t want to risk – not a penny? Here a few options to consider:
Virtual Banks According to the FDIC, the national average interest rate on savings accounts currently stands at 0.09% APY. You can find better rates at online banks, so-called virtual banks. These banks don’t carry the burden of maintaining a brick and mortar presence, and they can pass on the savings to you in higher yields. Most of these accounts are free, but minimums and withdrawal limits may apply. Rates range from 1.25- 1.70%. Open your account online in minutes and connect it to your regular checking account for secure back-and-forth transfers. Consider American Express National Bank, CIT Bank, Capital One, and Marcus by Goldman Sachs, among others. Be sure that your online bank is backed up by the FDIC.
Certificate of Deposit (CDs) If you can lock-up your money for a certain period, consider buying a CD. You don’t need $50,000 -100,000 for the highest rates since the greater competition for smaller amounts often leads to higher yields on amounts as small as $500. You will often find the best rates at credit unions. Generally, you will have to lock-up your money for at least 18 months to beat a savings account at a virtual bank. Rates range from 1.60% for an 18-month CD to 2.05% for a 5-year CD. Again, be sure your bank is backed up by the FDIC.
EE US Savings Bonds For very long periods – 20 years – consider old-fashioned series EE US savings bonds. Hold the bonds for 20 years, and you will get back at least double your initial purchase amount because the Treasury makes a one-time adjustment on the 20th anniversary of the purchase month, increasing the value to twice the purchase price equivalent to an annual yield of 3.53%! Income from EE savings bonds is state and local tax-exempt and federal taxes are not due until you redeem the bonds (or after 30 years when the bonds mature). Federal tax is also exempt if it is used to pay for qualified higher education expenses. The catch, redeem before 20 years, and your annual yield drops to just 0.10%. Purchase amounts are limited to $10,000 per person per year, and there are other restrictions. Buy at TreasuryDirect.gov.
Series I Savings Bonds One way to protect yourself against inflation is to purchase Series I bonds. Each Series I bond pays interest based on two components: a fixed rate of return plus a semi-annual variable rate that changes with fluctuations in inflation measured by CPI. The present fixed rate is 1.06%. If the economy enters deflation, your I bonds will never go below 0% interest per year. Hence your purchasing power would continue to increase even if you weren’t earning any interest on your money. Income from I bonds are exempt from state and local taxes but are subject to federal taxes. The most you can buy is $10,000 per year. For larger amounts, consider TIPS, Treasury Inflation-Protected Securities. You can buy TIPs directly at TreasuryDirct.gov (only in nonretirement accounts) or a bank or broker. Inflation protection is quite cheap right now.
Please let me know if you have any questions or if I can assist you in determining the right fit for you.
Enjoy a safe and fun Memorial Day weekend!
Henry
