Years ago, the news was filled about how Americans didn't save enough of their money. Nowadays, with the recession, it seems that all Americans are making sure they are saving a little each month for a rainy day.
Unfortunately for us, we aren't being rewarded for our good behavior. Interest rates on almost every deposit account is down from a few years ago but with a little digging, it's still possible to find a good savings vehicle that doesn't put your money at risk. It's important to remember that when it comes to savings, it's about keeping it safe.
While it's nice to see your emergency fund grow, remember what it's there for—protecting you when an emergency strikes. You never want to risk the principal just to chase after a few more percentage points in gains. You might see the headlines of the stock market jumping tremendously in one day and hit yourself for not investing. That's the wrong way to think about it!
When it comes to your savings, protecting principal is goal number one. Earning a few cents on the dollar is secondary. So what are your options today when it comes to getting a little more out of your savings? Unfortunately they are slim, since the Federal Reserve continues to keep its target funds rate low. There are, however, still some safe ways to earn a little interest without risking anything.
Your best bet here is to look at high yield savings accounts at an online bank. Online banks are able to offer higher rates than your local brick and mortar bank because their have lower overhead costs. Banks like Ally Bank and ING Direct don't have to run bank branches, filled with bank tellers and bank managers, so they can pass on part of that savings in the form of higher rates.
If online banking isn't your thing, consider looking at a credit union. Credit unions are owned by the depositors, so they offer much higher interest rates to deposit accounts. The main drawback to credit unions is a smaller footprint, so fewer ATMs and branches, but you more than make up for it with the personalized service and better rates on loans and deposits. When you put your savings in a bank, they are FDIC insured up to $250,000. When you put them in a credit union, they are NCUA insured up to $250,000.
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Certificates of Deposit
The appeal of savings accounts is the liquidity and you pay for that with lower rates. With certificates of deposit, you lose some liquidity because you are required to keep your savings until maturity. You are rewarded with higher interest rates. With an online savings account, you'll see rates currently around 1 percent. A 12-month CD currently yields around 1.20 percent, a 20 percent increase if you're able to keep the funds locked up for a year. If your flexibility allows you to open a 24-month CD, rates increase to around 1.5 percent.
If you are so bold as to open a 60-month CD, rates on those are around 2.5 percent. Whether or not those are a good deal depends on your specific financial situation and your alternatives, but with CDs the trend is simple—the longer the maturity period, the higher the rate. The best CD rates are always on CDs with long maturities.
Have you ever considered I Savings Bonds? I Savings Bonds are offered by the Department of the Treasury and are savings bonds that earn interest and protect you from inflation. Each Series I savings bond has a fixed interest rate and a floating inflation rate, announced each May and November, based on the CPI-U. The bond's interest rate calculation can be a little tricky, Series I bond interest rate calculators can help, but the current rate is 4.60 percent through October 31, 2011.
The minimum amount you can save is $25 when you purchase an electronic savings bond via TreasuryDirect or $50 if you purchase a paper savings bond, which are available at most banks. You must hold it for a minimum of one year and face an early redemption penalty of three months if you redeem it within 5 years. Finally, interest on savings bonds are subject to federal income tax unless used to finance education and exempt from state, municipal, and local taxes. As are all savings bonds, these are backed by the full faith and credit of the United States Government.
These are just three 100 percent-safe savings options for the diligent saver today. I didn't include some popular options like reward checking accounts, because it requires you to jump through a few hoops for higher rates, or money market accounts, since the yields didn't differ much from high yield savings accounts, but these aren't the only options out there. These are, however, representative of the best ones available right now.