Our family keeps a year’s worth of expenses (not income) put aside in cash reserves; it provides financial insurance with the side benefits of lower stress and less concern about stock market gyrations. In my opinion, emergency funds can actually have a better return on investment than what you see on your bank statement.
I don’t chase rates nearly as much as I used to, but it still pays to shop around. Too many places are paying ZERO or close to it – the Megabanks, short-term US Treasuries, and money market sweep funds. Do you know what Chase offers on a 1-year CD? 0.02% APY. Bank of America on their 10-year CD? 0.15% APY. Meanwhile, the rates below vary from 1% up to over 3% annualized.
Best Currently Available Interest Rates
Here is a brief roundup of the best interest rates available on deposits backed by the full faith and credit of the US government (FDIC-insured, NCUA-insured, US Treasury Bonds, US Savings Bonds). I will try to sort them from the shortest to longest maturities.
- High-yield savings accounts
- It seems every bank has their own online savings account, with the best accounts with long-term competitive rates earning around 1% APY. These savings accounts can change their interest rate at any time, so if you’re going to just pick the highest one, be ready to move your money.
- Short-term guaranteed rates (under 1 year)
- Everbank Yield Pledge Money Market and Interest Checking account both offer 1.60% APY guaranteed (balances up to $150k on the Money Market) for the first 6 months for new accounts. Since it is fixed, this is essentially a 6-month CD with a higher rate than any other 6-month CD rate out there and with no early withdrawal penalty to worry about.
- Flexible Savings Bonds
- “Series I” US Savings Bonds offer rates that are linked to inflation. Unfortunately, “I Bonds” bought right now will earn nothing for the first six months, and then a variable rate based on ongoing inflation after that. For new money, I would wait until mid-October when the next rate adjustment is announced. More info here.
- Rewards checking accounts
- These unique checking accounts pay above-average interest rates, but with some risk. You have to jump through certain hoops, and if you make a mistake you won’t earn any interest for that month. Rates can also drop quickly, leaving a “bait-and-switch” feeling. But the rates can be high while they last. Consumers Credit Union offers up to 5.09% APY on up to a $20k balance, although 3.09% APY is easier to achieve unless you satisfy a long list of requirements. I list this one because the rate is guaranteed until December 31, 2015.
- Certificates of deposit
- If you have a large cushion, it’s quite likely to just sit there for years. Why not put some money in longer-term investments where you can still take it out in a true emergency and pay an early withdrawal penalty. Synchrony Bank (formerly GE Capital Retail Bank) is offering a 5-year CD paying 2.25% APY $25k+ balances (2.20% APY for $2k+) with an early withdrawal penalty of 180 days interest. For example, if you withdraw from this CD after 2 years and pay the penalty, your effective rate earned will still be 1.69%. Capital One 360 also has a similar 5-year CD.
- Other notable CDs… USAlliance FCU has a limited-time, callable 25-month CD paying 2.27% APY (anyone can donate to eligible charitable organization to gain membership). E-Loan Bank has a 5-year CD paying 2.45% APY but with a big early withdrawal penalty of two years of interest.
- Longer-term Instruments
- Willing to lock up your money for 10+ years? Did you know that you can buy certificates of deposit via Vanguard’s bond desk? These “brokered CDs” offer the same FDIC-insurance and are often through commercial banks like Goldman Sachs. As of this writing, you can get a 10-year CD maturing 8/12/2025 that pays 3.05% APY. Prices will vary regularly.
- How about two decades!? “Series EE” US Savings Bonds are not indexed to inflation, but they have a guarantee that the value will double in value in 20 years, which equals a guaranteed return of 3.5% a year. However, if you don’t hold for that long, you’ll be stuck with the normal rate which is quite low (currently a sad 0.50% APY). Think of it as a huge early withdrawal penalty. You really want to be sure you’ll keep it for 20 years.
How about my money? In terms of the opportunities above, I have opened an account at Everbank in the past for the promo rate and I have usually try to buy the max in US Savings I Bonds each year (no EE bonds, too long of a commitment). I don’t currently juggle any rewards checking accounts nor do I have any deposits with any other banks mentioned above. It’s just not worth it me to switch right now.
Besides some older CDs at higher rates, I keep a good chunk of my money at Ally Bank because right now they are the all-around “good enough” bank for me. Sure I could eek out 1.05% in a savings account somewhere, but Ally Online Savings is paying a 0.99% APY (as of 8/6/15) which serves as a no-fee overdraft companion to my Ally Interest Checking with ATM fee rebates. Along the same lines, I could get 2.25% in an outside bank’s 5-year CD, but Ally has 2.00% APY on their 5-year CDs and a relatively short 150-day early withdrawal penalty. A rate difference of 0.25% on $10,000 over a year is $25, and I’m not sure that’s enough to open a CD at another bank when my current Ally CDs mature.
All rates were checked as of 8/6/15.