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Smart Deposit Account Options for Investors Trying to Weather a Rocky Market

With the Fed yet again deciding to hold off on an additional rate hike, yields on safe assets will remain low. Savers may be tempted to reach for yield by choosing higher risk investments, but as we’ve seen in January and now after the Brexit vote, savers can lose money quickly in a volatile market.

With stocks and bonds, higher yields always means higher risk. However, that’s not the case for deposit accounts. As long as you stay below federal deposit insurance limits, it’s possible to achieve higher yields with no additional risk. Of course, the yields attainable with deposit accounts are lower than what’s available with stocks and bonds.

Deposit account rates may be low in this terrible interest rate environment, but savers shouldn’t settle for average rates at brick-and-mortar banks. How bad are the average rates? The average savings account rate is only 0.15%, and the average checking account rate is only 0.11%.

Readers of DepositAccounts.com know that it’s possible to achieve deposit rates that are much higher. I thought it would be useful, especially for new DA readers, to review the ways savers can make 7x to 33x more on their savings.

Easiest Way to Earn More on Your Money - Internet Savings Accounts

The easiest and most effective way to earn more on your savings is to move your money from a checking or savings account at a brick-and-mortar bank to an internet savings account.

You can keep your checking account at your brick-and-mortar bank. Once you open the internet savings account, you can link the checking account to the new internet savings account. This allows you to easily transfer money to and from your checking account and the internet savings account using the internet bank’s online funds transfer service.

FDIC-insured internet banks are just as safe as brick-and-mortar banks. Deposits are FDIC-insured just like they are at brick-and-mortar banks, and if you’re concerned about money being lost in cyberspace, don’t worry. Federal regulations offer protections against fraudulent withdrawals. Just make sure to review your monthly statements.

Tips for choosing an internet savings account:

  • Look for interest rates in the range of 1% to 1.20%.
  • Beware of monthly fees. The ones with the highest rates tend to require a minimum balance to avoid a monthly fee.
  • Beware of the account rate history. The banks with the highest rates often don’t keep the top rates over the long run.
  • Review the bank-to-bank transfer features. Bank-to-bank transfers are often called ACH transfers since the transfers take place on the electronic network known as the Automated Clearing House (ACH). Beware of banks that have low ACH transfer limits and transfer times of 3 or more days. For more details, please refer to this post on ACH transfers and internet banks.

Reward Checking - Higher Rates But with More Effort

A new type of checking account has made it possible to earn higher interest rates than what you can earn from the best internet savings accounts. In fact, interest rates can be 4x higher than the best internet savings account rates. This new account is called a high-yield reward checking account. These accounts aren’t really new. Many have been around since 2007. They will likely be new for those who don’t pay attention to the banking industry.

The two main catches with reward checking accounts are activity requirements and balance caps. The required activity includes debit card usage and direct deposit. If the required activity isn’t done, the customer misses out on the high interest rate for the month. Typically, there are no monthly fees even if monthly requirements are not met. The high interest rate applies to balances up to a cap which can vary from $5,000 to $25,000 or higher. The portion of the balance above the cap earns much lower interest.

Tips for choosing a high-yield reward checking account

  • Look for interest rates in the range of 2% to 5%.
  • If you plan to use the account as your primary checking account, the required effort will be much less.
  • You may have local options. Community banks and credit unions around the country offer reward checking accounts.
  • Beware of falling balance caps in addition to falling rates. There are many reward checking accounts that started with balance caps of $25,000, but now have caps of $10,000.

For more details and tips, please refer to this post on reward checking account features.

CDs - Higher Rates Without Easy Access to Your Money

If you want higher interest rates than what’s available from internet savings accounts but you don’t want the work required with reward checking accounts, certificates of deposit (CDs) are reasonable options. CDs are also a good option if you have a large savings balance when you don’t have immediate plans for the money and you want to keep it safe.

These are deposit accounts with the same insurance coverage as savings and checking accounts. The difference is that you lock your money in for a certain term that can range from three months to ten years. In return for this lock, a bank or credit union typically pays higher interest rates than savings and checking accounts. Full access to the money is available when the CD matures.

One CD feature that is often overlooked by savers is the early withdrawal penalty. Money in a CD isn’t completed locked up. A CD investor can have access to it before maturity, but there will typically be an early withdrawal penalty. The penalty can reduce the interest earned up to the date of withdrawal. It can also eat into the principal, resulting in a total balance at the date of early withdrawal that is less than the initial deposit.

Tips for choosing CDs

  • Look for interest rates in the range of 1.25% to 1.75% for terms from 1- to 3-years.
  • Look for interest rates in the range of 2.00% to 2.50% for terms from 4- to 5-years.
  • Instead of short-term CDs, consider 5-year CDs with early withdrawal penalties of no more than 6 months interest. See the effective yields of CDs closed early using our EWP calculator.
  • Make sure you plan for when the CD matures. How long do you have to close the CD after maturity without a penalty (grace period)? What withdrawal options do you have?

My post on the 10 CD gotchas to avoid has more details that you may find useful before you invest in CDs.

Right Mix of Savings, Reward Checking and CDs

Determining the right mix of internet savings accounts, reward checking accounts and CDs depends on several factors. The four main factors include your desire to maximize interest, your savings timeframe, level of effort and amount of flexibility of accessing the funds.

Unlike stocks and bonds, you don’t have worry about increasing risk when you reach for yield on deposit accounts. Just make sure you stay below federal deposit insurance coverage levels. However, there’s no free lunch. Achieving higher yields on your deposit accounts requires some work, but it doesn’t take much work to improve yields quite a bit. If you want to do all that you can to maximize your yields, please give our tool, Where to Grow Your Cash, a try. This tool can help you find the best accounts and the right mix of accounts.

  |     |   Comment #1
Nice summary.

The odds are poor for a July or September Fed rate hike as I see it now.

I've been at least pondering Northwest FCU's 2.47% 5 year CD offer despite my previous vow of accepting no less than 3% for so long a term, but am still wary.  The thing is, even a halting trend toward tighter money over the next year or so could result in better yields, and I'd be left regretful.  When I capitulate, the market always turns, - but not willing to sacrifice myself for your sakes in that regard.
  |     |   Comment #2
Oh come on... be a good guy and take one for the team.
ben bernanke
  |     |   Comment #3
there is now a reasonable chance that the fed will cut rates a quarter point back to 0-0.25 so if you do wait , you may have regrets because the rates will be lower not higher.  The 10 year bond is already down to 1.46 percent
  |     |   Comment #6
Don't think I'm not aware of that, though believe it's unlikely in 2016 short of an unexpected crisis (Brexit doesn't qualify as such imo, - at least not yet).  My big money's available only in mid-August, and by then after two more jobs reports and more Brexit fallout any near recessionary trend should be clearer, - and the attraction of 2.47% (if still offered) possibly enhanced.
  |     |   Comment #12
i have been mostly staying in the 2-3 yr range for more than 5 yrs and of course now regret it...I think I am finally going to split my funds coming due this year between 2-3 and 5 yr cds...what are you doing?
  |     |   Comment #16
Consistent with my 3% floor resolution, the last CD commitments I've made were two and a half years ago at PenFed and last October with Northwest FCU.  With several CD's having matured since then, however (and more coming to term in August), I've put those funds in Everbank's 1.60% promotional rate liquid accounts, - but now with less than a month left to run for me.  So I'm feeling somewhat in a corner now, - but also fortunate, it should be said, I have the means to struggle over such a dilemma.  2-3 year CD's at under 2% just continue to strike me as unpalatable (the spread between these and liquid accounts simply not great enough to justify in my mind), but 2.5% over 5 years a low rate to commit to over so long a term while trends in the economy remain so difficult to gauge and interpret.  Additional RCA's for me are an option (at 2% liquid), - but with a half dozen already, the tedium of meeting transaction requirements would become even more onerous, - though still workable.  It's some combination of RCA's ,the highest yielding other liquid accounts I can find, and possibly a high-dollar 5 year CD from Northwest that I'm weighing then at present.  But shorter term CD's are out of the picture for me.  As said, I just don't find them attractive vis-a-vis the alternatives (though this may be as much psychological as calculative in my case).
  |     |   Comment #18
thanks for your hjoughts.. can you please tell me what an RCA account is
  |     |   Comment #19
Reward Checking Account.= one that has "work" or requirements involved. Usually 10-12 debit card transactions per month and other things.
  |     |   Comment #11
I looked at Northwest CU and their highest rate on a 5 year is 2.22% for a 5 year CD with a $250,000 minimum. The rate for CD's under $250K is 2.02%.
  |     |   Comment #13
As Ken wrote up recently, establishing Premiere Checking with them qualifies you for a .25% bump-up on this CD.  With at least a $250,000 deposit the rate becomes 2.47%. 
  |     |   Comment #14
Didn't see that on the website. $250,000 is s lot to put in 1 CD for 5 years at such a low rate. Also,. I wouldn't want to open a checking account.
  |     |   Comment #15
Have to over 62 and a member of Heritage Club,. Not sure what that is and what it costs.
  |     |   Comment #4
SO, southern company continues to perform well and the stock has a way above market yield.

Ive been very pleased I bought the stock several times starting in 2013.

And the stock actually went up when the market was tanking over the Brexit stuff.
  |     |   Comment #5
Not to stifle you, but this is a deposit accounts blog, and generally we don't talk about stocks here except to congratulate one another for avoiding them (wise or not).
  |     |   Comment #7
True, except in the vein of finding conservative alternative places to earn ANYTHING of a return.  Not wanting to turn this forum into discussions of the stock market, but rates are SOOOOoooo low that any alternatives should be considered.  (just my opinion, and I appreciate yours).
  |     |   Comment #8
And thats why I mentioned it. 
Because rates are so low and SO has a heckuva fantastic track record of increasing dividends.
However, Im not sure how much of a pullback the stock has had in the past and might again have in the future because Ive only been following it closely for a 3+ years.
I bought at $44.40, then 125% more at $40.51 and then more at $45.01.
Plus dividend reinvestments. And now its over $52. My return is more than I expected. Heck, I would have been fine with just the dividend and no price appreciation.
This is my first utility stock.
  |     |   Comment #17
As you imply, there's no real return until you sell, and who knows how happy you'll be with it when that happens, - the kind of uncertainty that makes many of us here back off from what might seem fantastic now.
Ken Tumin
  |     |   Comment #10
Last year, 11 articles were written providing overviews of conservative alternatives to deposit accounts. You can review these starting with the 11th article. The opening paragraph of each article links to the previous article in the series.

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