Let me start off by being very frank. I feel strongly everyone should have a savings account in a secure, accessible, interest bearing account. The purposes of this account should be to fund any short term goals you may have and also help pay for emergencies or unexpected job loss. You won’t earn much interest(typically around .01%) but you do get the benefit of an FDIC insured account. This prevents you from being leveraged to credit cards when unfortunate and unplanned situations arise.
But maybe you are disappointed in the feeble interest rates that most big banks are currently paying. Or you feel you should being getting a little more for lending your money to the bank. The goal of this post is to give you information about some alternatives(or supplements) to the traditional savings account.
Certificates of Deposit(CD)
CD’s offer the security of a savings account(they are FDIC insured) but with a little higher interest rate. What’s the catch? You have to be willing to give up access* to your money for the term of the CD. Think of it like you are loaning your money to the bank for a specific, pre-determined amount of time and in exchange, they pay you interest.
Terms** for CD’s can vary anywhere from 1 month to 10 years. Take a look at the example below and notice the connection between the term of the CD and interest rates(assume $1,000):
A 12-month Certificate of Deposit at Chase Bank currently pays .02% interest.
A 4-year Certificate of Deposit at Chase Bank currently pays .25% interest.
*You are able to access your money prior to the end of the CD, but you will face fees and loss of any interest earned.
**Check out this website for a list of current CD rates or visit your local bank’s website.
Most people would not be thrilled about giving their money to the federal government. However, Treasury Securities are considered highly stable investments (often described as “zero risk”) because they are based on the stability of the government of the United States, simply because the likelihood of government default or overthrow is basically nonexistent.
Here are three main types of Treasury Securities:
Your parents or grandparents may have purchased a savings bond for you when you were born, but you can also purchase them yourself. Savings Bonds are purchased at face value(a $50 savings bond costs $50) and the interest accumulates for up to 30 years. Like a CD, you must hold the bond for some time(usually one year) or face a loss of interest and fees. They earn a fairly low interest rate, but this interest compounds(semi-annually), meaning that the value of a savings bond accelerates over time, unlike other treasury securities.
Would you pay $97 for something that is worth $100(on paper)? This is precisely what happens when you purchase a Treasury Bill. Bills are sold at a discount, which is equal to the amount of interest you would earn. However, Treasury Bills do not pay any interest directly; instead, they are sold at a discount of their face value and thus “earn” by selling at face value upon maturity. Rates vary from .25%(1 month) to .60%(1 year).
The third option for purchase are Treasury Notes, sold in terms of 2, 3, 5, 7 or 10 years. You pay face value for the bond, interest is paid and credited every six months(semi-annually), and when the note matures you receive the face value. Here’s an example:
Say you have a $10,000 ten year treasury note with a interest rate of 4.25%. Every six months, you’ll receive a payment of $217.50 from the government, then when the note matures, you can redeem it for $10,000.
The United States government has made it very easy to invest in treasury securities via the Internet. The site TreasuryDirect.gov enables you to purchase these treasuries directly from the government either as an auction participant or at a set price, and also manage these investments by indicating what you wish to happen to the interest payments and what happens upon maturity.