The interest rates shown are valid as of May 1, 2020 and are subject to change. Check with each financial institution for current rates before making any investment decision.
For millions of Americans, the economic disruption caused by the coronavirus outbreak has underscored the importance of emergency savings. One problem: With interest rates near record lows, it’s harder than ever to find a good place to keep that money.
Of course, as jobs disappear, many of us are just focusing on how to pay next month’s bills. But statistics show that those with some financial security have gone to great lengths to hide what they can.
Businesses and consumers deposited a record $ 1 trillion in deposits with banks in the first quarter of 2020, based on an analysis of FDIC data by The Wall Street Journal. This was about four times the amount deposited in the last three months of 2019.
More Americans are likely to be looking for places to save, since the government’s $ 1,200 per capita stimulus checks started rolling out earlier this month.
There are no easy answers. Interest rates are what they are, and you’re not going to find a secret option with double-digit returns. And savers, beware: Options that seem appealing at first glance can come with baggage like expiration of teaser fares, access delays, or withdrawal penalties.
“Don’t be careful, go crazy,” advises Harold Evensky, financial planner at Evensky & Katz in Lubbock, Texas. “An extra percentage return on an emergency fund is not worth the risk that it isn’t there when you need it. Focus on security.
That being said, some options for your money are better than others, and we’ve done a bit of homework to find out what that is.
High yield savings accounts
“High” is a relative term these days, but you can still find savings accounts with mouthwatering returns. Many of them come from online banks, which are just as legitimate (and FDIC-insured) as their brick-and-mortar counterparts.
Good to know: Marcus by Goldman Sachs (the consumer arm of reputable investment banking) offers 1.55% APY, with no fees or minimum account. This is four times the national average. Other enticing 1.5% options include American Express National Bank, Capital One, Barclays, Ally, and Synchrony.
The advantage of a simple savings account is that you don’t lock your money where it’s hard to access – which, after all, is the value of having an emergency account. These accounts are FDIC insured, up to $ 250,000 per depositor, per bank, so you can be sure your money won’t disappear even in an economic disaster.
Money market accounts and funds
These accounts tend to offer higher rates than direct verification, but generally limit the number of monthly transfers or withdrawals. Here, too, you can find attractive prices. Discover, for example, currently offers 1.25% APY, with a minimum of $ 2,500. Ally, on the other hand, attracts savers with a zero account minimum – but offering slightly lower interest, at 0.75%. You can find even better deals if you’re comfortable with small businesses, like Minnesota-based Affinity Plus Credit Union offering 2.02% and no minimum.
There are also money market “funds”, which can be purchased through brokerage houses, but as mutual funds, these money markets are not FDIC insured in the same way as accounts. savings. They could theoretically lose value, as happened following the Lehman Brothers bankruptcy in 2008. But the US Treasury has already developed a package of measures to support money markets, as part of the government’s response. government to the coronavirus crisis.
While standard savings accounts allow you to put money in or withdraw it at will, certificates of deposit work a little differently. You deposit a fixed sum for a fixed period and thus benefit from relatively high interest rates.
For example: Marcus by Goldman Sachs offers 1.60% APY on 12 month CDs. Meanwhile, Barclays is offering 1.40% and Discover 1.5%, for the same duration.
The potential danger of this strategy is that most CDs charge early withdrawal penalties, if you need that money before the end of the term. (Some offer versions without penalty, but with lower interest rates). So if the purpose of your cash fund is to have immediate and unhindered access in an emergency, it may not be right for you.
One creative idea is to shift your CDs, suggests Monica Dwyer, a financial planner from West Chester, Ohio. This way you have money on hand while another part is locked in and generates higher returns for you.
A mixed approach
Of course, no law says that you have to choose only one avenue for your money. Financial planner Joseph Stemmle of Richmond, Va. Recommends a powerful mix of multiple options: “Building a three-tiered cash reserve is essential to making your money work harder,” he says.
“Level 1 corresponds to one month of spending on a checking or savings account with your main bank, level 2 corresponds to 1 to 3 months of spending on a high-yield savings account insured by the FDIC with no minimum , and level 3 is 3-6 months of spending on CD, treasury bills, or short-term bonds.
Whichever route you choose for your savings, remember that your first principle should be: safety first. If you reach for an artificially high return, but end up locking it in for an extended period of time or putting the sum at risk, you defeat the goal of having emergency savings in the first place. If and when you find yourself in a real financial crisis, this is not a happy place.
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(An earlier version of this story did not distinguish between money market accounts and money market funds.)