5 low-risk ways to earn 5% or more on your money this spring
Driven by soaring inflation, the Federal Reserve swiftly initiated a series of interest rate hikes in 2022, maintaining them at elevated levels to date. The goal was to temper economic growth and stem inflation to a more manageable degree by increasing the cost of borrowing.
However, the surge in borrowing expenses has also led to higher interest rates for savers and investors alike. While projections suggest the possibility of rate cuts by the Fed in 2024, the present landscape offers numerous opportunities for attractive returns. For those seeking a yearly percentage yield (APY) of 5% or higher this spring, here are five investment avenues to explore.
Certificates of Deposit
With Certificates of Deposit (CDs), you secure the certainty of earning a fixed interest rate while safeguarding your principal, within the limits of applicable FDIC or NCUA insurance, provided you refrain from premature withdrawals. Presently, numerous CDs offer yields of 5% or more, although typically, short-term CDs yield higher returns than their long-term counterparts, reflecting the anticipation of impending interest rate decreases.
Rob Williams, managing director of financial planning at Charles Schwab, suggests considering CDs as a relatively low-risk option for funds not immediately required for day-to-day expenses. Incorporating CDs with appropriate maturity periods into your portfolio's cash investment allocation or investment cash management plan could prove advantageous at this time.
High-Yield Savings Accounts
Another option for potentially earning 5% or more on your money, while safeguarding your principal within applicable insurance limits, is a high-yield savings account. Compared to CDs, high-yield savings accounts offer greater flexibility in terms of moving funds in and out. Unlike CDs, which may penalize early withdrawals with a loss of interest, high-yield savings accounts allow for more freedom in accessing your funds.
However, it's important to note that high-yield savings accounts come with reinvestment risk due to fluctuating interest rates. While a rise in interest rates can lead to higher monthly interest payments for high-yield savings accounts, CD rates remain fixed throughout the term.
Money Market Accounts
Money market accounts share similarities with high-yield savings accounts, although the rates, deposit prerequisites, and access to funds may vary among financial institutions. Therefore, it's essential to review the terms offered by your chosen banking establishment.
If you prioritize daily access to liquidity, both high-yield savings accounts and money market accounts can be advantageous.
Money market accounts, like high-yield savings accounts, can also benefit from federal insurance. However, they are susceptible to the same risk posed by fluctuating interest rates.
Money Market Funds
Distinct from money market accounts, which are deposit-based, a money market fund functions as an investment account offering a relatively low-risk avenue to potentially earn 5% or more. Money market funds typically maintain a stable value and invest in secure fixed-income assets, such as government bonds, though the specific portfolio composition varies among funds.
Numerous money market funds are available that rival CD rates but without the time commitment associated with CDs. These funds are accessible to retail investors via trading platforms or financial advisors. Moreover, they offer liquidity, allowing for swift liquidation on any trading day, should the need arise.
Treasury Securities
Lastly, Treasury securities, including Treasury Bills and Treasury Bonds, offer slightly higher returns than CDs and are widely regarded as secure investments due to their backing by the federal government. For instance, the 10-year US Treasury is considered the risk-free rate of return.
However, while holding Treasuries to maturity can yield 5% or more, they lack the stable value along the way that some other options provide. Investors who directly purchase Treasury securities should closely monitor the risk of increasing interest rates, as selling a Treasury Bill before maturity could result in losses.
The Bottom Line
In summary, there are numerous avenues to achieve a 5% APY or higher on your investments this spring. Even if interest rates experience a slight decline, strategies like investing in CDs or holding Treasuries until maturity can help secure your returns.
However, for those comfortable with assuming a bit more risk, potential for greater returns may lie elsewhere, such as in equities. The recent strong performance of the stock market, coupled with the prospect of Federal Reserve interest rate cuts, suggests that this momentum in the equity market may persist. Nevertheless, for those hesitant to jeopardize their principal, these alternative options still offer the potential to outpace inflation and foster growth in their funds.