"Make your money work for you."
It’s one of the oldest clichés in personal finance—up there with “buy low, sell high,” “diversify your holdings,” and “a penny saved is a penny earned”—but these days your money has never been so inept. Thanks to low growth, aging economies, and the Great Recession hangover, if you had stashed $10,000 of your hard-earned money in the average savings account at the beginning of 2016 and collected 365 days of interest, you would have celebrated the new year with a whopping gain of $6. Don’t spend it all in one place, because it’s not even all yours. That six bucks is taxable income, so if you’re in the 28% bracket, you’d be left with $4 and change.
This is literally the worst deal since before the time of the Pharaohs in Egypt. Bank of America Merrill Lynch actually studied interest rates going all the way back to 3,000 B.C. and couldn’t find rates this low. The average bank savings account pays 0.06%. Many of the big banks pay a mere 0.01%, which, from the perspective of your wallet, is the same as nothing.
But you can do better. Not all-expenses-paid-trip-to-Vegas better, but maybe take-your-girlfriend-out-for-a-nice-dinner better, even after taxes. And thanks to some unintended consequences of government regulations that went into effect last October, a few savings account alternatives are suddenly paying more. Here’s how to get a return on your cash, even with interest rates at a 5,000-year low.
SAFE SAVINGS BETS
1. High-yield savings
Despite the lousy rates at most banks, a few, mostly online, offer a little more than 1%. That’s $100 or more on that $10,000 investment in the first year. Still not great, but also not nothing. Ally and Synchrony banks are consistently top payers, and they are FDIC insured, so there is virtually no risk. You can find the best current rates at bankrate.com or depositaccounts.com. Just make sure the bank you choose is FDIC insured. If you’re looking at a credit union, which you should because they often pay higher rates, make sure it is NCUA insured.
2. Certificates of deposit
CDs are also safe and pay higher rates the longer you agree to tie up your money. Here’s a trick from Colorado financial adviser Allan Roth: One Ally Bank CD paid 1.75% (on a $25,000 deposit) at press time, and requires you to agree to leave your money in there for five years. But here’s the thing: You can pull it out and pay a penalty of five months’ interest. So if you take it out after a year, you still earn 1.02%, just a little less than the Synchrony savings account. So if you don’t need the cash, leave it in there and keep getting the higher payouts. You would earn $2,265 in five years on a $25,000 investment. If interest rates keep falling, you’ll feel like a genius, because no one will be offering 1.75% any more. Again, use BankRate or Deposit Accounts to find the best rates, and only use government-backed institutions.
3. Money market
If you have an investment account at a brokerage—such as Fidelity or Schwab—it’s hard to put that cash in savings or a CD. But if you let it sit around, the default cash option usually pays squat. As a result of new money market mutual fund regulations that were enacted in response to the Great Recession, some money market payouts have risen in the past few months. Dump your cash in a fund such as the Vanguard Prime Money Market Fund (VMMXX), which yields 0.60%.
4. Bond funds
An irrefutable truth: The higher the return, the higher the risk. But bond funds offer a nice middle ground. For a limited risk, you can boost your income. The Vanguard Short Term Bond ETF (BSV) pays about 1.23%. You can go out a little farther on the risk/reward curve with the Vanguard Total Bond Market (VBMFX) fund, which yields about 2.3%, or the Vanguard Intermediate-Term Investment Grade (VFICX), which yields 2.8%. The FPA New Income Fund (FPNIX) fund yields a bit less but might hold up better if bonds fall in value, which many experts are predicting under a higher-growth, higher-inflation Trump administration.
5. Tax-free bond funds
Recently, thanks to some weird dynamics in the world of bonds, these tax-free bonds started paying slightly more than their taxable equivalent. Consider the Vanguard Tax-Exempt Money Fund (VSMXX), which pays around 0.6%.
RISKIER SAVINGS BETS
6. Big payouts, plus risk
If you are willing to take the risk of a loss in exchange for big payouts, here are a couple of ideas: Bank loans are loans made to companies with less-than-perfect credit, but they are unlikely to go bad absent a serious economic decline. One nice feature is that they tend to be issued at “floating rates,” which means that if interest rates rise, so do the payouts. Consider the Blackstone/GSO Senior Floating Rate Term fund (BSL), which yields about 7%. Another interesting place to look for income is preferred stocks, which are a cross between a stock and a bond. They are a bit safer than stocks, but offer less upside. In return, they offer higher yields. You can invest via the iShares U.S. Preferred Stock (PFF) exchange-traded fund, which yields 5.7%. That sure beats 0.06%.
Jack Otter is the author of Worth It...Not Worth It? Simple & Profitable Answers to Life’s Tough Financial Questions.