Yahoo Finance I’m a Financial Planner, This Is Why Investing in a High Yield Savings Account is Better Than a CD Right Now
The deeper we get into 2023 and away from pandemic-era saving habits and stimulus checks, the slimmer Americans’ savings accounts are starting to look. Previous projections from the Federal Reserve Bank of San Francisco had Americans depleting their pandemic-era savings accounts by the third quarter of 2023. That hasn’t happened, recent reports show, but it’s getting close.
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Data from the U.S. Bureau of Economic Analysis revealed that the personal savings rates in August 2023 had fallen to 3.9%, less than half of the decades-long average of 8.51%, CNBC reported.
If you’re among the people looking at your dwindling emergency savings and wondering about the best steps you can take to boost it, financial planner Thomas J. Brock, CFA®, CPA, an expert contributor for Annuity.org, shared some advice with the GOBankingRates team. And it’s not what you might expect.
Financial Experts Recommend High-Yield Savings Over CDs
“In today’s highly inflationary and elevated interest rate environment, achieving a competitive yield on your cash reserve is critical to preserving the purchasing power of your money,” Brock explained in an emailed statement. “For many people, the preferred savings vehicle is either a certificate of deposit (CD) or a high-yield savings account. I prefer the latter.”
Brock said he doesn’t expect short-term interest rates to decline any time soon, so there’s little sense in locking up your money for six months to a year or more with a CD.
“You may be able to get a higher yield with a CD, but the liquidity lock-up does not justify the premium,” he said. “I am comfortable keeping my money in a high-yield savings account, the best of which are currently offering rates in excess of 5.25%.”
Choosing the Best High-Yield Savings
When you’re choosing a high-yield savings account, you have a multitude of options, from online banks to traditional financial institutions. But there’s one thing that’s crucial to remember, according to Brock. “[M]ake sure you only deal with members of the Federal Deposit Insurance Corporation,” he said. “This will ensure your money is safe — up to $250,000 for individual accounts and $500,000 for joint accounts.”
If you choose a credit union, your money should be insured by the National Credit Union Administration (NCUA) for up to the same amount. This is the credit union equivalent of the FDIC.
If you choose a fintech, or neobank, as they are sometimes called, make sure your funds are backed by a chartered U.S. bank to ensure FDIC protection. Even the financial service provider PayPal now offers a high-yield savings account, which is backed by Synchrony Bank. PayPal delivers a yield of 4.30%, which is competitive to many online banks and much higher than the national average, GOBankingRates previously reported.
Brock offered additional advice on what to look for when you’re ready to choose a financial institution. “When shopping for a high-yield savings account, be sure to focus on more than the interest rate,” he said. “Look for institutions that maintain robust, online platforms that make it easy for you to quickly deposit and withdraw funds without incurring any fees.”
An Alternative Investment To Consider
Brock also suggested an alternative to a high-yield savings account. “I am just as comfortable putting my cash reserve into a U.S. government money market fund, which is a professionally managed mutual fund that invests in short-term U.S. government securities and other obligations issued or guaranteed by the U.S. government and its agencies,” Brock said.
Not to be confused with a money market account at a bank, which is similar to a savings account, U.S. government money market funds are available through a brokerage account and typically insured for up to $500,000 by the Securities Investor Protection Corporation (SIPC). As with a savings account, you can withdraw your money penalty-free at any time.
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“These vehicles are just as safe as the best high-yield savings accounts and offer comparable yields,” Brock said.
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This article originally appeared on GOBankingRates.com: I’m a Financial Planner, This Is Why Investing in a High Yield Savings Account is Better Than a CD Right Now
