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What to do with your money now that the Fed has raised interest rates

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  • These accounts now offer competitive interest rates of 5% or more, making them an excellent option for easily accessible funds.
  • With rates approaching 6% APY, CDs are ideal for those who can lock in their money for a set term, though early withdrawal penalties may apply.
  • U.S. Treasury bills, notes, and bonds provide virtually risk-free returns, with yields around 5%, and offer the added benefit of being exempt from state and local taxes.

The Federal Reserve has been aggressively raising interest rates over the past year to combat stubbornly high inflation. As of May 2024, the federal funds rate stands at a target range of 5.25% to 5.5% - the highest level in over two decades.

While higher interest rates make borrowing more expensive for consumers and businesses, they also present opportunities for savvy savers to earn higher returns on their cash. If you've been sitting on the sidelines with money in low-yielding accounts, now is the time to explore better options to make your cash work harder for you.

High-Yield Savings Accounts

One of the most straightforward ways to take advantage of rising rates is by opening a high-yield savings account (HYSA). Unlike traditional savings accounts that pay paltry interest rates, often under 0.1% APY, high-yield accounts are now offering yields of 5% or more.

For example, LendingClub Bank is currently paying a 5% APY on its High-Yield Savings account with no minimum balance requirement after the initial $100 deposit. Synchrony Bank's High Yield Savings account earns 4.75% APY with no minimum balance as well.

The key advantage of HYSAs is that your money remains easily accessible while earning a competitive return. This makes them an excellent option for emergency funds or other short-term savings goals.

Certificates of Deposit (CDs)

If you have a longer time horizon and don't need immediate access to your cash, certificates of deposit (CDs) may be a better choice. CDs offer fixed interest rates for a set term, typically ranging from a few months to several years.

According to Ken Tumin, founder of DepositAccounts, "There's no reason to accept anything less than 5% on savings accounts and CDs." The best one-year CD rates are currently approaching 6% APY, while top-paying two-year and five-year CDs are yielding around 5% and 5.1%, respectively.

Some standout CD rates include:

Kenowa Federal Credit Union: 5.8% APY for 12 months

M1 Bank: 5.8% APY for 10 months

Eagle One Federal Credit Union: 5.1% APY for 5 years

Northwoods Credit Union: 5.1% APY for 5 years

The tradeoff with CDs is that you typically cannot withdraw your money before the maturity date without incurring an early withdrawal penalty. However, one strategy to maintain liquidity is to build a CD ladder by staggering multiple CDs with different maturity dates.

Special CD Promotions

In an effort to attract new deposits, some larger banks have started offering special promotional CD rates that can rival or even exceed the best nationally available rates. For example, Citi has offered a 12-month CD paying over 5% APY to new customers.

While these special CD deals can be lucrative, Ken Tumin cautions that "they often auto-renew into standard CDs with very low rates." Be sure to understand the terms and conditions, and be prepared to move your money when the promotional period ends.

Treasury Securities

Another option for generating income from your cash is investing in U.S. Treasury securities, such as Treasury bills, notes, and bonds. These government-backed securities are considered virtually risk-free and currently offer yields competitive with top savings and CD rates.

For example, the yield on a 1-year Treasury bill is currently around 5%, while a 2-year Treasury note yields approximately 4.5%. Longer-term Treasury bonds can provide even higher yields, but carry more interest rate risk.

One advantage of Treasuries is that the interest income is exempt from state and local taxes. However, they may be less convenient than bank accounts for smaller investors.

Maximize FDIC Insurance Coverage

Regardless of which savings vehicle you choose, it's crucial to ensure your deposits are fully insured by the Federal Deposit Insurance Corporation (FDIC) up to the maximum limit of $250,000 per depositor, per bank.

This coverage limit applies to the combined total of all your accounts at the same bank, including checking, savings, money market accounts, and CDs. By spreading your cash across multiple FDIC-insured banks, you can protect larger sums.

Credit unions offer similar coverage through the National Credit Union Administration (NCUA). Joint accounts are insured up to $500,000 per couple.

The Bottom Line

With the Federal Reserve's interest rate hikes, there are now abundant opportunities for consumers to earn attractive yields on their cash holdings. From high-yield savings accounts and CDs to Treasury securities, the key is to shop around and explore options that align with your financial goals and liquidity needs.

As Phil Blancato, chief market strategist at Osaic, notes, "Savers are finally making some money. So guess what? Cash is not trash." By taking advantage of today's higher interest rates, you can ensure your cash is working hard and keeping pace with inflation.

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