You Can Now Get an Easy 5% Return on Your Cash With No Risk

As inflation and interest rates have increased, the rates paid on cash deposits have barely budged – until now.

With inflation averaging more than 8% for 2022, the Federal Reserve increased interest rates several times, hiking the benchmark federal funds rate from its target of 0-0.25% in March 2o22 to 4.5-4.75% by February 2023. And while bankers were quick to hike rates on mortgages, car loans and credit cards, they were slow to pass those higher rates onto customers holding savings accounts.

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Consider that the average U.S. bank savings account started 2022 paying a paltry 0.06% and, after the rapid series of Fed rate hikes, ended the year only slightly improved: 0.30%. Rates on certificates of deposits weren’t much better, ranging from 0.81% for six-month CDs to 1.17% for five-year CDs.

Good News For Savers

Now, however, some accounts are finally starting to give savers a break – if they’re willing to shop around. While the average five-year CD rate is 1.18%, savers can get an APY of 4.39% from First Internet Bank and even 4.50% from BMO Harris for accounts with a balance of as little as $1,000.

Interest rate volatility has made things even better when it comes to one-year CDs. While long-term interest rates are typically higher than short-term rates, the yield curve inverts during times of economic turmoil, with near-term rates going higher than long-term rates. That’s because bankers fear large interest rate hikes will – as the Fed intends – dampen economic activity, possibly sending the economy toward a recession. Not wanting to be trapped paying higher long-term CD rates during a recession when other rates drop, bankers boost near-term rates and leave long-term rates lower.

As a result, savers can get three-year CD rates that are as good as five-year returns, while some one-year CD rates are even better than five-year certificates.

Inflation Risks Linger

That’s the good news. The bad news, of course, is that even an attractive 5% return won’t allow your money to keep pace with inflation, which was 6.4% in January. While inflation has fallen from its June high of 9.1%, rising prices continue to erode the value of every dollar that’s stashed in a savings account or CD.

That’s why financial planners insist that retirees in their 60s, 70s or even 80s need to keep some of their money in stocks, which historically beat inflation. At the same time, retirees are encouraged to keep up to three years of living expenses in stable holdings, such as money market funds and cash. Having that money on hand allows retirees to ride out market ups and downs while maintaining their standard of living once they’ve stopped working.

Over time, at least in theory, the various trade-offs of risk and return can provide a stable financial footing over many years of retirement.

Bottom Line

As of February, the Fed is expected to add a few more rate hikes to cool off the surprisingly strong economy, which could send CD rates even higher. While one-year rates may continue to best five-year rates, that won’t last forever. Sometime before the end of 2024, inflation is expected to be tamed, interest rate hikes will pause or even reverse, and long-term rates will return to topping near-term rates. Savers can consider laddering CDs to grab higher short-term rates, then roll that cash into longer-term five-year CDs when short- and near-term rates begin to decline.

Tips for Boosting Your Savings

As your income increases throughout your career, the temptation to spend more will certainly set in. This is known as lifestyle creep or lifestyle inflation, and it can limit your ability to save more for retirement and other financial goals. Keeping your expenses and spending levels relatively stable when you get a raise or a new job can help you scale up your savings.
A financial advisor can help you set savings goals and budget more effectively. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

The post You Can Now Get an Easy 5% Return on Your Cash With No Risk appeared first on SmartAsset Blog.

Source: https://finance.yahoo.com/news/now-easy-5-return-cash-203259344.html