For anyone trying to save money right now, the Fed's interest rate cuts are bad news. Banks have been lowering the interest rates they pay on savings accounts, and the relatively safe money market funds that many savers rely on have also seen rates fall by a couple of percentage points. Along with rising inflation, those numbers mean savers are getting a raw deal.
But there are ways to boost those returns, according to financial experts. Here are six suggestions:
Consider your horizons. Even though their yields have fallen, money market funds still make sense for savers who plan to withdraw the money in the short term, such as over the next year, says Dan Shackelford, vice president and portfolio manager at T. Rowe Price. They tend to generate higher returns than savings accounts and generally carry a low level of risk. Although you may be tempted to lock your money up in a longer-term certificate of deposit that pays a higher rate, doing so could cost you money if you need to close out the CD before it matures. Early withdrawal typically carries a penalty of forfeited interest.
Invest in the market. Shifting savings from more conservative accounts to the stock market makes sense for longer-term investors, says Sri Reddy, head of retirement income strategies for ING U.S. Wealth Management. Savers who don't need the money soon can withstand the market's volatility, he adds.
Split your savings. For consumers who want to use some of the money in the short term but are willing to part with the rest of it for a longer period, Reddy suggests putting some of it in a conservative place, such as a savings account or money market fund, and the rest in the market.
Take on additional risk. While everyone has a different tolerance for risk, taking on more of it tends to mean higher returns, along with increased volatility. In the bond market, for example, riskier bonds pay higher yields. Vanguard High-Yield Corporate Fund Investor Shares carry a 8.13 percent yield, for example. "The trade-off [for taking on risk] is that you're getting compensated a little bit more, and if the economy goes through an extended period of tepid growth, it probably could be a better investment," Shackelford says.
Consider your tax bracket. Tax-exempt money market funds, which invest in municipal securities, let investors avoid federal, and sometimes state, taxes. "It's more valuable to those in the higher tax brackets," Shackelford says.
Compare interest rates. For consumers looking to keep their money as safe as possible, savings accounts are a conservative choice, but they are not all created equal. Reddy says that online banks, and not just his own, tend to offer higher interest rates. (ING's savings accounts currently pay 3 percent. In contrast, regular savings accounts at Bank of America pay 0.2 percent.)