Banks today are flush with deposits, therefore they don’t need to pay much interest on that money. According to the FDIC, the average interest rate paid on bank checking accounts, savings accounts, money market deposits, and one-year CDs is 0.04 percent, 0.24 percent, 0.29 percent, and 0.90 percent, respectively. Compare that to inflation, which is running between 7 and 8 percent.

Are you worried about losing buying power by leaving cash in your bank accounts? (Spoiler alert: You should be!) If so, here are three alternatives that pay better interest and are still low-risk.
  1. Mutual market funds. Unlike money market deposit accounts at banks, money market funds are NOT FDIC-insured. However, many of these funds invest in highly liquid, low-risk U.S. government treasuries. For example, the current yield on Schwab Treasury Obligations Money Fund (SNOXX) is 3.48 percent. There are many similar funds from which to choose.
  2. Short-term treasuries. The current yield on a two-year treasury note is 4.4 percent. Even shorter-term, three-month treasuries are yielding more than 4 percent. If you purchase and hold the bond until it matures, you will obtain this yield. You can purchase these bonds on most platforms. A good way to learn about bond investing is to purchase short-term U.S. government bonds. For example, if you sell a bond before it matures, your total return may be more or less than the 4.4 percent cited above. Generally, if you sell the bond and interest rates have increased since you purchased it, your return will be lower. However, if you sell the bond and interest rates have decreased since your purchase, your return will be higher.
  3. i-Bonds. Treasury “i-Bonds” (learn more) are a terrific long-term savings vehicle for those wishing to protect themselves against inflation. The current rate is 6.89 percent. I-Bonds pay investors interest based upon a formula that closely mirrors inflation. Important note: One downside of i-Bonds is that you must keep them in place for one year. If you do cash it out before five years, there is a penalty of three month’s worth of interest, which isn’t that bad, relatively speaking. You can purchase $10,000 per person per year, and an additional $5,000 per person by applying your tax refund. Consider investing $10,000 per year and increasing your balance each year.

How long banks will continue to pay extremely low interest on deposits is anybody’s guess. As you can see from this graph, total deposits are finally showing a slight downtick. At some point, banks will be forced to pay more for deposits, but in the meantime, it might be wise to protect your nest egg using alternative savings vehicles.

Ask Tilly if you have any questions!