Higher interest rates have changed the saving game
of ConsumerAffairs
Inflation remains sticky, suggesting the Federal Reserve could keep interest rates higher for longer. What does that mean for your money? Has the financial landscape changed in the last few weeks?
We put those questions to financial professionals, asking specifically where to park some cash for the next few months. Kevin Ross, a financial advisor at Cardea Capital Advisors, recommends a high-quality money market mutual fund for your money over the next six to 12 months.
Many money markets are paying around 5.25% which offers a very high degree of safety and liquidity, making this option the clear winner versus certificates of deposit (CDs) or bonds, he told ConsumerAffairs. Equities are not appropriate for a six to 12-month holding period as anything can happen in such a short period of time.
Ross believes inflation may start to cool and at some point, the Fed will start to lower rates a bit. Lower rates, he says, make bonds less attractive.
Patrick Yip, senior director of Business Development at APMEX, says putting extra money into a CD is a great way to collect some interest if you wont need the cash in the short run.
But there is a downside
With the federal funds rate between 5.25% to 5.50%, a good rate on a CD is in the high 4% or low 5% range, he told us. The downside of CDs is they have an early withdrawal penalty if you try to cash out before the maturity date. A better alternative may be to deposit your money with a brokerage firm, many of which pay interest rates in the high 4% range but without any early withdrawal penalty.
CDs are available for various terms, from one month to several years. Ross says longer-term CDs generally are the most attractive but some short-term instruments can pay up to 5%.
Another attractive technique is holding cash in a money market fund inside of a life insurance policy or annuity, which creates tax advantages, Ross said. All of your interest accumulates tax deferred and in the case of life insurance, if you take out the money the right way, you may be able to take out the money tax-free.
If youre going to need the money within a year, I highly recommend not taking any risk and putting the money in a safe vehicle or investment, said Keith Spencer, founder of Spencer Financial Planning. I typically recommend putting this money in a high-yield savings account, short-term U.S. Treasury securities, or short-term bank CDs.
Shopping for a CD has never been easier since online banking allows you to put your cash into any bank, no matter its physical location. ConsumerAffairs researchers reviewed 33 banks and picked the seven best CDs.
Photo Credit: Consumer Affairs News Department Images
Posted: 2024-05-07 14:48:08
