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Investors have many options when saving for short-term goals, and those choices have become more complicated in an environment of high inflation and rising interest rates.
Although there have been signs of slowing inflation, Federal Reserve waits 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 savings options.
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Although the Fed’s federal funds rate reached the the highest level in 15 yearssavings account interest rates did not fit these hikesexplained Tumin.
As of January 4, online high-yield savings accounts paid an average of 3.48%, according to Deposit accountssome small banks reaching 4%.
Still, if you’re keeping money in a savings account, Tumin said it’s best to stick with established banks.
He warned savers to be “really careful” with fintech companies that partner 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 weird environment where we can actually get a higher rate for short-term CDs than for long-term CDs,” he said.
It’s kind of a weird environment where we can actually get a higher rate for short-term CDs than for long-term CDs.
Ken Tumin
Founder and Publisher of DepositAccounts.com
While Tumin expects savings account interest to rise, those rates may not match 1-year CDs, which tracked the Fed more closely and offered an average of 4.81% as of Jan. 4. , according to DepositAccounts.
“From that perspective, you might be better off with a one-year CD than an online savings account over the next year,” he said.
Series I bonds still a ‘big consideration’ for short-term investors
As inflation soared, Series I Bondsan inflation-protected and almost risk-free asset, have also become a popular choice for short-term savings.
I bonds currently pay 6.89% annual interest on new purchases through April, down from the 9.62% annual rate offered from May to October 2022.
“These have become very popular among our clients as rates have skyrocketed,” said Certified Financial Planner Eric Roberge, founder of Beyond Your Hammock in Boston. “That makes them excellent considerations for short-term investors.”
I bonds earn monthly interest in two parts: a fixed rate, which can change every six months for new purchases but remains the same after purchase, and a variable rate, which changes every six months depending on the ‘inflation.
While the current annual rate of 6.89% may be attractive, the yield could change in May, based on six months of inflation data. Since you can’t access the money for a year, it’s possible to lock in a lower rate after the first six months.
Still, if you need your money in one to five years, that might be a choice worth considering, Roberge said.