• November 30, 2022

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Are you tired of losing money on your investments and seeing the interest rates on your debt increase? When it comes to rising interest rates, there is one bright spot: higher interest rates on your cash. Here are the pros and cons of some ways you can take advantage of that to make your money work harder for you:

Rewards Checking Accounts

Highest current interest rate: 5%

Pros: Not only do these FDIC or NCUSIF-insured accounts pay higher interest than most other checking accounts, but many also have no maintenance fees and even reimburse fees charged from using another bank’s ATM.

Cons: The highest rates are offered by small, community institutions that are unlikely to have a branch anywhere near you, so you’ll likely need to do your banking remotely. To qualify for the higher interest rates and ATM fee reimbursements, you must satisfy certain criteria every month that typically consist of using direct deposit, making 10-15 debit card transactions per month, and receiving only electronic statements. There’s also a maximum of usually between $10-25k that can earn that rate.

Bottom line: Reward checking accounts can make a lot of sense for someone willing to bank online and use their debit card a lot.

High-Yield Savings Accounts

Highest current interest rate: 3.5%

Pros: They pay relatively high interest rates without the requirements and limits of reward checking accounts. While many of them are from online-only banks, you can typically link them to your checking account.

Cons: As savings accounts, they don’t have unlimited withdrawals each month. Other options pay more on at least some of your money.

Bottom line: High yield savings accounts can be good for an emergency fund or savings for short term goals like a vacation or holidays where you don’t need to be withdrawing money very often.

Stable Value Funds

Interest rate: varies

Pros: These funds generally hold intermediate term bonds to earn higher interest rates than money market funds and then use an insurance “wrapper” to try to keep the funds from losing money if interest rates go up.

Cons: They’re only available in retirement accounts and many funds have restrictions on when you can take your money out of the fund. The “stable value” isn’t always guaranteed and even when it is, the guarantee is only as good as the insurance company providing it.

Bottom line: Stable value funds can be a great place to hold cash in a retirement account, but be sure to read the fine print about how easily you can access your money and the risks.

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Series I Savings Bonds

Current interest rate: 9.62% (if purchased by Oct 28)

Pros: These bonds are fully backed by the federal government against default, and they do not fluctuate in price so they have minimal risk. In addition, they’re exempt from state and local taxes, federal taxes on the interest can be deferred and they can be used tax-free for qualified education expenses if you meet the requirements.

Cons: Each person is limited to purchasing $10k per year electronically at treasurydirect.gov plus another $5k a year with IRS tax refunds. The interest rate is adjusted every 6 months with inflation so it will be reduced if inflation comes down. Once you purchase them, you can’t cash them in for the first 12 months and you lose the last 3 months of interest if you cash them out in the first 5 years.

Bottom line: I bonds can be a great option for anyone who’s looking for a safe place for money they don’t need in the next year since you’re still ahead of a typical savings account even after the 3-month interest penalty.

Peer-To-Peer Lending

Prosper average historical return: 5.7% (but may be greater now with higher interest rates)

Pros: Web sites like Prosper allow individuals to loan money directly to other individuals based on criteria like the interest rate and length of the loan, the borrower’s credit score and debt-to-income ratio, and what the borrower intends to use the money for. As a result, you can decide whether you want to take more risk for potentially greater returns or less risk for more safety.

Cons: Deciding between loans can be time consuming and you may have trouble getting your money back early or even at all since the loans are not insured or collateralized.

Bottom line: Peer-to-peer lending is more speculative and riskier than the others so think of it as more of an investment than a savings vehicle.

During times of rising inflation and falling balances in investment accounts, these rates may offer little solace. However, inflation rates and investment returns are likely to return to their historical averages. In the meantime, we may as well take advantage of these interest rates by making our money work as hard as possible.

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