Interest rates are low, but these options might offer you more
Consumer Reports magazine: June 2013
When a bank advertises a 1 percent savings interest rate as "high yield," you know savers must be frustrated.
That certainly was the consensus among more than 6,500 Consumer Reports readers we surveyed recently on bank and brokerage annoyances. They were far more peeved by the piddling pennies on their statements than they were by excessive fees and commissions, unhelpful Web tools, or even the hurdle of reaching a live person on the phone. In fact, low interest rates were the only issue that stood out as bothering readers in our survey.
Interest rates should go up once unemployment drops and economic growth accelerates. In the meantime, the options below might offer more for your savings. Switch only if you don't have to change a lot of automatic-payment and direct-deposit arrangements, and avoid fees that can erase the interest you earn. The choices are listed from low to moderate risk.
Online banks. The most competitive online banks—institutions without a brick-and-mortar presence—have been offering interest rates around or slightly below 1 percent, far higher than what's available through walk-in banks. Barclays.com's savings account recently had an annual percentage yield of 1 percent with a $1 minimum balance. With $10,000, you'd get $100 in the first year at Barclays compared with $5 at most with Chase Plus, which was offering a microscopic 0.01 percent APY for savers who weren't linked to certain active checking accounts and 0.05 percent for those who were. Bankrate.com, BestCashCow.com, and Nerdwallet.com let you search for other "high yield" bank and credit-union accounts.
Certificates of deposit. A long-term CD may be worthwhile if the early-withdrawal penalty is small. For instance, Web-based Ally Bank was recently offering a 1.54 percent APY on its five-year CD, with a withdrawal penalty of just 60 days' interest. If you held your $10,000 there and withdrew after a year, the APY would still be 1.28 percent, yielding compound interest of $129. That's better than the $89 you'd get with a one-year CD from Ally itself and more than twice the average $63 you'd get from one-year CDs from competing banks. To see how early withdrawal would affect yields from any CD, check out the calculators at cdcalc.herokuapp.com and depositaccounts.com.
High-yield checking. These no-fee accounts pay competitive rates up to a certain level of savings. For example, Consumers Credit Union (not related to Consumer Reports or Consumers Union), based near Chicago, recently offered 3.09 percent on balances of up to $5,000. For those rates, though, you need to actively use your account each month, via regular direct deposit and debit-card transactions and other activities. You also get reimbursed for ATM fees from other banks if you meet certain requirements. A number of institutions providing this type of account participate in a program called Kasasa Cash; check their requirements before signing up. To search for such accounts offered locally and nationwide, go to kasasa.com.
Guaranteed principal and interest
Series I savings bonds. This is the exception to our short-term advice because it includes a variable-interest-rate component that adjusts twice a year with inflation. That flexibility helps protect you even when interest rates begin to rise. (Through April of this year the interest rate on I bonds was an annualized 1.76 percent; new rates were unavailable at press time.) You pay a penalty of the last three months' interest if you redeem the bond in the first five years. Buy them in any amount from $25 to $10,000 at treasurydirect.gov.
Not federally guaranteed or insured
Dividend exchange-traded funds. ETFs, as they're known, are low-expense funds that generally track an index and are traded like stocks. Dividend ETFs are composed of a collection of dividend-paying companies, which are typically known for their stability and low price volatility. But they carry a higher degree of risk than the other options listed here. Look for low fees and expenses; the Vanguard High Dividend Yield Index ETF (VYM), for instance, has an expense ratio of 0.1 percent; recently it was yielding 3.13 percent.
Short-term bond funds and ETFs. The corporate and government bonds in these funds are typically of only a few years' duration. (The corporate bonds in these funds and ETFs are not federally guaranteed or insured.) You won't make much currently; investment research giant Morningstar.com says the average short-term bond fund is yielding just 0.76 percent. But the high-quality, low-cost ETF Vanguard Short-term Corporate Bond (VCSH) was recently yielding 1.2 percent. When interest rates go up, bond prices drop. But a well-managed fund will be poised to jump on higher rates, so the risk of losing your principal isn't substantial.
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