Our family keeps a full year of expenses put aside in cash reserves, it provides us with financial stability with the additional side benefits of lower stress and less concern about stock market gyrations. Emergency funds can actually have a better return on investment than what you see on your bank statement.
But that doesn’t mean I shouldn’t still maximize my interest earned, especially as cash is an asset class where doing some research can often increase your return without having to take on additional risk (if you stay FDIC-insured or equivalent). Things are tough these days with such low interest rates, but with low potential returns everywhere, an incremental 0.50% or 1% more can still be significant. Watch out for money market funds paying 0.05% or less. Here’s another update on what’s currently out there, with high-interest checking accounts, US savings bonds, and flexible bank CDs:
Short-Term, Flexible Certificates of Deposit
I don’t know where rates will go, so finding the best combination of high rates now plus flexibility for the future is the goal. Some top rates:
- TIAA Direct is a new savings account with a rate of 1.25% APY, no guarantee of how long that will last though.
- Everbank has changed the rate on their Yield Pledge Money Market and Interest Checking account to 1.10% APY guaranteed for the first 6 months for new accounts. Since it is fixed, that is better than any other 6-month CD rate out there.
- CIT Bank has a 2-year Achiever CD that pays 1.25% APY for a 2-year term with two unique features – both a “rate bump” option if rates rise, and the ability to add more money if rates drop.
- Ally Bank has a similar Raise Your Rate CD with the rate bump feature; the 2-year term pays 1.05% APY and the 4-year term pays 1.30% APY.
Rewards Checking Accounts
Usually through smaller credit unions with limited membership areas, these checking accounts pay a higher interest rate if you jump through several hoops. However, if you make a mistake you’ll forfeit virtually all your interest for that month, so it can be tricky. While I made a lot of interest from these accounts over the past few years, it appears the party is ending as anything above 2% APY won’t last long.
Your best bet is to find a local rewards checking account by using the filters over at DepositAccounts.com. I no longer have any money in any rewards checking account as the benefits are too low for the time and effort of jumping around, especially when I could just do some $500+ credit card bonuses for much more (non-taxable) easy money.
Long-Term, Flexible Certificates of Deposit
If you have a large cushion, it’s quite likely to just sit there for years or more. Therefore, I think it’s okay to put some of it in longer-term investments. With the Ally Bank certificates of deposit, you can still access your money as long as you pay a early withdrawal penalty of 60 days interest. That’s significantly less than at other banks. I have 5-year CDs paying 3% APY, but the current rate for new deposits is 1.60% APY for a 5-year CD. I’ll show you below why this is still a competitive and flexible rate.
Let’s analyze a CD paying 1.65% APY with an early withdrawal penalty of the last 60 days of interest. Here’s how your actual annualized interest rate would fluctuate given your holding period.
If you hold it a year and withdraw, you are already at 1.38% APY – try to find any similar 12-month term CD that beats those rates. The rate on this CD keeps falling, but if you bought this previously you’re happily locked in at closer to 3% APY.
U.S. Savings Bonds
For inflation-linked Series I Savings Bonds, the total rate earned consists of a fixed rate and a variable rate that adjusts with inflation every 6 months. Series I bonds bought right now will earn 2.21% total for the first six months, and then an unknown rate based on ongoing inflation after that. You must hold them for a year, and if you redeem them within 5 years you lose the last 3-months of interest. Still, the net rate is still better than most competitive CDs, and you get ongoing inflation protection. More info here.
I’ve been very happy with my historical purchases of these bonds. For 2012, the annual purchase limit for electronic U.S. savings bonds bought at TreasuryDirect is now $10,000 per series, per person.
Day-to-day Banking Needs
Since I already have my CDs there, I remain happy with Ally Bank for my daily banking convenience and emergency fund needs. Their Interest Checking currently pays 0.40%-0.75% APY and their Online Savings is at 0.85% APY (as of 11/12/13). I like Ally due to their checking features like no fees, ATM fee rebates everywhere (even at ripoff Las Vegas casinos), and free overdraft transfers from savings. This allows me to keep a minimal balance in checking and more in savings/CDs. Check out my Ally Bank Checking account review for an in-depth rundown.