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Investors have many options when saving for short-term goals, and those choices have become more complicated amid high inflation and rising interest rates.
While there have been signs of slowing inflation, the Federal Reserve is expecting higher interest rates to continue.
“It looks like this year might be a little tricky,” said Ken Tumin, founder and editor of DepositAccounts.com, a website that tracks the most competitive options for savings.
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Although the Fed’s federal funds rate has reached the highest level in 15 years, savings account interest rates haven’t matched these hikes, Tumin explained.
As of Jan. 4, online high-yield savings accounts were paying an average of 3.48%, according to DepositAccounts, with some smaller banks reaching 4%. The rates published are the top 1% average.
Still, if you’re keeping money in a savings account, Tumin said it’s better to stick with established banks.
He cautioned savers to be “real careful” with financial technology companies partnering with banks for checking and savings accounts and other cash products. “You should go directly to FDIC-insured banks, rather than through fintechs,” Tumin said.
It’s a ‘strange environment’ for certificates of deposit
Another option for savings, certificates of deposit, or CDs, may present opportunities for short-term savers, Tumin said.
“It’s kind of a strange environment where we actually can get a higher rate for short-term CDs than long-term CDs,” he said.
It’s kind of a strange environment where we actually can get a higher rate for short-term CDs than long-term CDs.
Founder and editor of DepositAccounts.com
While Tumin expects savings account interest to rise, these rates may not match one-year CDs, which have more closely followed the Fed, and were offering an average of 4.81% as of Jan. 4, according to DepositAccounts. The rates published are the top 1% average.
“From that point of view, you might be better off with a one-year CD than an online savings account over the next year,” he said.
Series I bonds are still a ‘great consideration’ for short-term investors
As inflation has soared, Series I bonds, an inflation-protected and nearly risk-free asset, have also become a popular choice for short-term savings.
I bonds are currently paying 6.89% annual interest on new purchases through April, down from the 9.62% yearly rate offered from May through October 2022.
“These have become very popular among our clients as the rates have skyrocketed,” said certified financial planner Eric Roberge, founder of Beyond Your Hammock in Boston. “This makes them great considerations for shorter-term investors.”
I bonds earn monthly interest with two parts: a fixed rate, which may change every six months for new purchases but stays the same after buying, and a variable rate, which changes every six months based on inflation.
While the current 6.89% annual rate may be appealing, the yield may change in May, based on six months of inflation data. Since you can’t access the money for one year, there’s the potential to lock in a lower rate after the first six months.
Still, if you need your money in one to five years, this could be a choice to consider, Roberge said.
Clarification: This story has been updated to clarify details on the savings account and CD rates published by DepositAccounts.com.