It makes me sick to my stomach to see to see my savings just sitting there earning point one percent interest – not one percent mind you but point one. On the other hand, this is my “safe” money. These are funds I don’t expect to use but need to have a principal guarantee and want to have some access to in case of a job loss or some major emergency. The funds can’t be invested in stocks due to the fluctuation of principal, and if there is any chance I might need the funds in a year, it’s the absolute worst time to buy bond funds with interest rates being so low.
I know I am not alone in this since the prime lending rate dropped to 3.25% due to the 2008 housing crisis and has stayed low to help boost the economy – everyone’s savings rates are low. With the prime lending rate that low, no one can expect a liquid account to be high but seriously, point one? We have to be able to do better than that. Here is what I found after doing some exploring.
Liquid (or relatively accessible) accounts that pay higher interest than regular savings:
Money market account. These liquid accounts sometimes have a minimum balance requirement of $10,000 or $25,000 but can pay more than double the rate of a savings account. However, they aren’t all FDIC insured even if they are at a bank so double check with your financial institution. According to Bankrate.com money market interest rates this week range from .05% to a high of 1.05%. Internet banks may pay higher rates than the brick and mortar but you’ll have to decide how important the convenience of a local branch is.
To compare money market rates in your local area – click here.
Share accounts. Credit unions are known for paying higher interest rates than other institutions. They are backed by the National Credit Union Administration not the FDIC. Their accounts are called share accounts since credit unions are owned by their members and they often pay a higher interest rate. Their sweet spot isn’t in liquid accounts per se but they may still have higher rates than banks. They really add value in car loans and mortgages but they are worth a look. According to bankrate.com, credit union money market accounts range from .05% (which is pretty dismal) to .75% (which is pretty good). Click here for more information about credit unions in general.
Savings bonds. Another option is to invest in good old-fashioned savings bonds. Savings bonds are little different in that you have to keep them for a year but after that time frame, you can redeem them anytime. Series EE bonds currently pay .60% but the actual tax equivalent yield is a little higher if you live in a state where you have an income tax because there are no state income taxes on the earnings – only federal income taxes are due. Since I live in Utah, my state income tax is 5% so I can squeak out an additional .03% to make it the equivalent of .63% without the state tax break.
I know it seems like a half a percent here and there doesn’t make much of a difference but it does. The money you have earmarked for “safe money” has to stay safe so year after year it sits there earning next to nothing. But if you figure $10,000 earning .10% earns you ten bucks a year but at .63% it earns you sixty three bucks a year …after year…after year. By changing to one of the above accounts, I figure in ten years you would have an extra $500 bucks for no extra work – now that I can live with.