Where Should I Put My Savings? Options for the Medium-Term
(Bloomberg Opinion) -- We often discuss saving money in terms of extremes: immediate savings we may need in a pinch and long-term savings we’ll tap decades later in retirement. For the most part, we know where to stash these two buckets of cash: a savings or checking account for the former, an IRA or 401(k) for the latter.
But what about mid-term goals? Money we’ll want in the not-too-distant future for a down-payment on a house, wedding or Bat Mitzvah? Is there a way to make the most of these savings safely, to earn a decent return without the risk?
“High-yield” savings accounts were a good answer to this — offering more interest than banks’ traditional savings products while also being accessible, liquid and FDIC-secure. But in today’s low-interest environment, they offer next-to-nothing returns, anywhere from 0.4% to 0.7% interest, according to the latest data from Bankrate.com. After factoring in inflation (currently up by 1.4% in the U.S. and standing at 0.4%), any money sitting in these accounts may end up technically losing value.
Investing in stocks doesn’t quite work for a medium-term time frame either — especially if you’re like me and have only a modest appetite for risk. The reason is that bear markets, defined as a 20% drop in the stock market followed by a period of slowdown, are cyclical. Since 1945, there have been more than a dozen bear markets, occurring nearly every five and a half years. The standard rule of thumb is to not invest any money in the stock market that you might need to access within the next five to seven years, so that your account has time to recover in the event of a pullback or crash.
Is there a friendly go-between? A savings strategy that, in spite of all this, feels like you’re winning?
I’ll be honest, the pickings are slim at the moment, but I did manage to identify a few strategies that strike a balance.
If you can’t beat inflation, maybe join it? In my reporting I was reminded of I Bonds, a relatively safe U.S. government-backed investment sold directly to the public. They won’t make you rich, but they will track your cash alongside inflation so, at the very least, you won’t “lose” money. With inflation on the rise, it’s something to chew on.
The savings rate for I Bonds is a combination of a fixed rate and an inflation rate that’s established twice a year. The current rate is 1.06% and you can technically withdraw the cash after the first year, though you’ll lose the last three months of earned interest.
After five years, you can withdraw without penalty. Also worth noting: The savings cap is $10,000 per year for electronic I Bonds, or $5,000 for paper I Bonds. “It’s not a cure-all, but an option to consider,” says Bankrate’s Senior Financial Analyst Greg McBride.
Consider ultra-high-yield accounts, but note the caveats. There are some lesser-known financial institutions and credit unions offering relatively higher savings rates of anywhere from 2% to 4%, but they require following some specific rules. The first is usually that you can only earn the rate on a limited amount of money, ranging anywhere from $1,000 to $25,000, depending on the bank.
Additionally you may need to make minimum monthly direct deposits and debit card transactions. One other key caveat, says McBride, the yields are not fixed and can change. After going through the efforts to transfer your money, your return may be curtailed.
I personally don’t like to use a debit card too often for security reasons, so this type of account wouldn’t work well for me, but if you don’t mind the habit, this could be a suitable way to supplement your savings.
Bank on bonuses. Some of the more traditional savings accounts, while earning next to nothing, are enticing new customers with “welcome” offers and one-time bonuses for opening an account.
These bonuses come with fine-print catches too, however: You usually need to deposit a minimum amount of money and set up direct deposits for a number of consecutive months to basically show that you’re an active account holder. But earning, say, a $250 sign-up bonus, which is not unheard of, for depositing $1,000, is an instant 25% “return.” Not a bad score.
Don’t discount the discount. Finally, some banks offer a “relationship” rate discount to existing savings account holders if and when they apply for a loan in-house. This is a way to take advantage of your savings to better afford the goals you have down the road – pursuits that require financing like purchasing a new car or home.
Allow me to illustrate: When we were applying for a mortgage in March, the lender told us we could earn up to a 0.5% discount on the interest rate if we kept a certain amount of money at their bank. We weren’t existing customers, so moving money over was a bit cumbersome and time-restricted, as we had to do it before closing on the house in a month ( all in a pandemic). But we knew it would be worth it. Making the move earned us a smaller interest rate and saving $100 each month.
If you discover your existing bank has this incentive, depending on your midterm goals, the best strategy might be to stay put.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Farnoosh Torabi is a financial journalist, author and host of the "So Money" podcast.
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