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Investors have many options to save for short-term goals, and these decisions have turn out to be more complicated in the face of high inflation and rising interest rates.
Although there are signs of slowing inflation, the Federal Reserve expects higher interest rates to proceed.
“Looks like this yr may be a bit of a challenge,” said Ken Tumin, founder and editor of DepositAccounts.com, a web site that tracks the best saving options.
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Although the Fed’s federal funds rate hit a 15-year high, interest rates on savings accounts failed to match those increases, Tumin explained.
As of January 4, high-yielding online savings accounts were bringing in a median of 3.48 percent. Deposit Accountswith some smaller banks reaching 4%.
Still, in case you’re keeping money in a savings account, Tumin said it’s higher to stick to established banks.
He warned savers to be “really careful” about financial technology corporations working with banks for checking and savings accounts and other cash products. “You must go directly to FDIC-insured banks, not fintechs,” said Tumin.
It is a “strange environment” for certificates of deposit
Tumin said one other savings option, certificates of deposit or CDs, could present a possibility for short-term savings.
“It is a bit of an odd environment where we are able to actually get the next rate for short-term CDs than long-term ones,” he said.
It is a bit of an odd environment where we are able to actually get the next rate on short-term CDs than long-term ones.
Ken Tumin
Founder and editor of DepositAccounts.com
While Tumin expects savings account rates to rise, those rates may not match annual CDs, which have more closely followed the Fed and averaged 4.81% since Jan. 4, according to DepositAccounts.
“From that time of view, you may be higher off with an annual CD than a web-based savings account for the next yr,” he said.
Series I bonds are still “of great interest” for short-term investors
As inflation increased Series I bonds, an inflation-protected and nearly risk-free asset, have also turn out to be a well-liked selection for short-term savings.
I Bonds now pay 6.89% annualized interest on recent purchases through April, up from the 9.62% annualized rate offered May through October 2022.
“These have turn out to be extremely popular with our customers as rates skyrocketed,” said certified financial planner Eric Roberge, founder of Beyond Your Hammock in Boston. “This makes them excellent for short-term investors to consider.”
I bonds earn monthly interest consisting of two parts: a set interest rate that may change every six months for brand new purchases but stays the same after purchase, and a variable interest rate that changes every six months depending on inflation.
While the current annualized rate of 6.89% could also be attractive, the yield may change in May, based on six months’ inflation data. Since you can’t access the money for a yr, there may be a possibility to lock in a lower rate after the first six months.
Still, in case you need the money in one to five years, it might be a selection to consider, Roberge said.