In early February, average rates on savings accounts nationally were around 0.11%.1 That’s not nothing, but it sure is close.
The bad news for savers is that there isn’t a lot of yield to be found, at least not from investments that are safe enough to be considered as a home for your cash. But even if you can’t earn a lot on your cash, that doesn’t mean you can’t do significantly better.
“There are a range of income options that can offer a meaningful increase in income; you could potentially increase the yield on your savings by a significant amount,” says Richard Carter, a vice president of fixed-income products and services at Fidelity. “The key is to understand what you need the money for, and then find an option that makes sense for your situation.”
First consider your goals
Before you look for higher-yielding options, take a second to reconsider the role of your cash in your financial plan. (Read Viewpoints: Earn more from your cash.)
|The goal: Everyday expenses||The goal: Emergency fund|
|The goal: Near-term savings target||The goal: Low-volatility, "short-term" allocation in long-term portfolio|
Once you have decided what kind of savings vehicle might make sense for you, consider these options:
High-yield savings accounts
The good news: While traditional savings accounts offer nearly no interest these days, some banks offer higher-yielding savings options. In some cases, the yields are slightly above 1%, and these accounts come with full FDIC protection—meaning the government would protect you from losses in the event of a problem with the bank (see "Insurance for your cash" for more details). Because the money is not invested, you maintain access to your savings. Some banks offer bonus rates for regular saving or other perks.
The bad news: While a high-yield savings account can allow you to access your cash, it may not be the same setup as your corner bank. Some of these accounts are offered online only, and some may not offer ATM access. It makes sense to shop around. You need to be aware of fees, which could eat into your interest, and account minimums, which can be required for the best rates. Also, the FDIC insurance limit may require accounts at several banks to meet your needs.
The good news: These days, certificates of deposit offer significantly higher yields than most savings accounts. As of February 2, some one-year CDs offered 0.90% interest. For $50,000 of cash, that means $450 in interest, compared with $5 in a typical savings account. If you are saving for a goal in three years, a three-year CD pays 1.45%, or roughly $725 per year.
There are multiple ways to buy CDs. You could buy one directly from a bank, or you could buy one through a brokerage, known as a "brokered CD." If you buy a brokered CD as a new issue, there are no transaction costs or management fees.
Up to $250,000 per person, per bank, for a given ownership category, is eligible for FDIC protection. For some people, that is not enough. A brokerage account can aggregate brokered CDs from different FDIC banks in one account, so you may be able to put more than $250,000 in CDs without running into the FDIC insurance limit. A brokerage also allows you to sell your CD if you need the money before maturity (but see the bad news, below). You could also consider a ladder of CDs to balance reinvestment risk and yield.
The bad news: In exchange for higher rates, you have to accept lower liquidity. This means, if you own a brokered CD and need to sell it to access your investment before its maturity, you would have to turn to the secondary market, which would incur transaction costs, and you may need to sell for a loss.
But a better way to manage the trade-off of higher yields and lower liquidity from CDs is with a ladder. A ladder arranges a number of CDs with staggering maturities, freeing up a portion of your investment at preset intervals. If you choose to reinvest, eventually your ladder will yield the prevailing rates of the longest-date CDs. Say you start with one-, two-, and three-year CDs. In year one, you reinvest the maturing one-year CD in a new three-year CD; at the end of year two, you reinvest that original two-year CD in a new three-year CD. Now you have rungs maturing every year, but all offer the yield of a three-year CD. (Watch our video.)
The table below shows how the rates available increase the longer investors are prepared to commit their money—providing close to a 2% yield on a five-year CD.
|3 mo.||6 mo.||9 mo.||1 yr.||2 yr.||3 yr.||5 yr.|
|Source: Fidelity.com. As of February 2, 2016.|
The good news: Money market funds offer easy access to your investment and very little risk. Held in your brokerage account, they come with check-writing and ATM card access similar to a savings account, and making these investments a good option for funds you may need in a hurry. And, if interest rates rise, those higher rates will pass through to money market funds quickly. Some prime and government money market funds have seen yields tick up with the Fed’s year-end move, with yields on some prime funds at 0.20%-0.30%, and the average prime fund offering about 0.12%.
The bad news: The yields offered by the types of securities in which money market funds invest have been stubbornly low in recent years. While iMoneyNet reports that the average prime money market fund, which invests in corporate debt, had a yield of 0.12% as of January 29, the average government fund yield was only 0.05%—and those yields sometimes come with high minimum investment requirements. While fund providers have reimbursed investors for fees if they are greater than yields, it has meant paltry shareholder earnings in recent years—particularly for municipal funds, which on average continue to yield 0.01%. So you may find security and easy access to your funds, but you won’t find much yield unless the interest-rate environment continues to change.
You should also note some regulatory changes taking place for prime and municipal money market funds. In a time of market stress, these non-government types of funds could be subject to a fee or temporary halt on withdrawals. So they may no longer be as liquid as U.S. Treasury or government money market funds. Learn more.
|Average yield (seven-day yields)|
|Source: iMoneyNet, as of January 26, 2016. Yields show the average seven-day yield for money market mutual funds in the category.|
The good news: Individual bonds offer a range of credit risk levels and yields for a variety of maturities. These securities could be laddered, and the range of credit risk in the market means that you can select a yield–risk option that suits you.
The bad news: Unlike CDs or savings account, individual bonds don’t offer FDIC insurance. A corporate bond also comes with the risk that the company will not make good on its obligations, known as credit risk. You also may not be able to find a buyer if you decide to sell, forcing you to accept a lower price if you need access to your investment. And interest rates rise, the price of your bond will fall. These risks mean it is important to consider whether a bond is an appropriate alternative investment for your cash. You should also try to diversify among individual bonds, perhaps by holding a number of securities from different issuers. To achieve diversification, it might require that you invest a significant amount of money. You also have to account for transaction costs—the fees to buy or sell individual securities—as well the market price, which could mean you have to sell for a loss.
|3 mo.||6 mo.||9 mo.||1 yr.||2 yr.||3 yr.|
|CDs (New Issues)||0.50%||0.65%||0.70%||0.90%||1.20%||1.45%|
|U.S. Treasury Zeros||0.29%||0.44%||0.57%||0.59%||0.82%||1.03%|
|Corporate (AAA)||0.32%||- -||0.82%||0.88%||1.33%||1.70%|
|Source: Fidelity.com as of February 2, 2016.|
Short-duration bond funds and ETFs
The good news: Bond funds aren’t insured the way CDs are, but many actively managed bond funds and ETFs do offer professional credit research, portfolio construction, and broad diversification to help manage credit risk. They also offer competitive yields.
The bad news: Bond funds come with management fees, and the value of your investment will change as the market rerates the prices of the bonds in the fund’s portfolio. You can’t hold a fund to maturity, so you may suffer a loss when you try to access your money. Defined maturity funds offer professional management and diversification, with declining price volatility as the fund approaches its target maturity. (Learn more about defined maturity funds.)
For an example of short-duration bond funds, here are the top results for short-term bond, and ultra-short bond category funds from Fidelity’s mutual fund evaluator. (Note: The top results are as of February 2, 2016, sorted by three-year return, and show top results for Fidelity funds and for all funds.) You should do your own research to find bond funds that fit your time horizon, financial circumstances, risk tolerance, and unique goals.
|Ultra-short Term Bond Funds|
|Fidelity Conservative Income Bond Fund (FCONX)|
|PIMCO Short-Term Fund Class D (PSHDX)|
|Western Asset Adjustable Rate (ARMZX)|
|Short-Term Bond Funds|
|Fidelity® Limited Term Bond Fund (FJRLX)|
|Fidelity® Short-Term Bond Fund (FSHBX)|
|Kinetics Alternative Income Fund No Load (KWINX)|
|Frost Total Return Bond Fund Investor Class Shares (FATRX)|
What about higher yielding options?
High-yield savings accounts, CDs, money markets funds, and short-duration bonds all have the potential to help you generate more income from your cash. But what about higher-yielding options? Longer-dated bonds, high yield bonds, preferred and convertible securities, or even dividend-paying stocks all may offer higher yields than these options. But beware of chasing yield—if you are looking for alternatives to cash, you likely can’t live with the risks that these higher-yielding options provide. So those options may make sense for part of a diversified investment portfolio, but may not be the answer to improving returns on your cash.
Credit ratings can also speak to the credit quality of an individual debt issue, such as a corporate note, a municipal bond, or a mortgage-backed security, and the relative likelihood that the issue may default.
‘AAA’—Extremely strong capacity to meet financial commitments; highest rating.
‘AA’—Very strong capacity to meet financial commitments.
Lower yields - Because of the inherent safety and short-term nature of a CD investment, yields on CDs tend to be lower than other higher risk investments. Interest rate fluctuation - Like all fixed income securities, CD valuations and secondary market prices are susceptible to fluctuations in interest rates. If interest rates rise, the market price of outstanding CDs will generally decline, creating a potential loss should you decide to sell them in the secondary market. Since changes in interest rates will have the most impact on CDs with longer maturities, shorter-term CDs are generally less impacted by interest rate movements.
Credit risk - Since CDs are debt instruments, there is credit risk associated with their purchase, although the insurance offered by the FDIC may help mitigate this risk. Customers are responsible for evaluating both the CDs and the creditworthiness of the underlying issuing institution.
Insolvency of the issuer- In the event the Issuer approaches insolvency or becomes insolvent, it may be placed in regulatory conservatorship, with the FDIC typically appointed as the conservator. As with any deposits of a depository institution placed in conservatorship, the CDs of the issuer for which a conservator has been appointed may be paid off prior to maturity or transferred to another depository institution. If the CDs are transferred to another institution, the new institution may offer you a choice of retaining the CD at a lower interest rate or receiving payment.
Selling before maturity - CDs sold prior to maturity are subject to a concession and may be subject to a substantial gain or loss due to interest rate changes and other factors. In addition, the market value of a CD in the secondary market may be influenced by a number of factors including, but not necessarily limited to, interest rates, provisions such as call or step features, and the credit rating of the Issuer. The secondary market for CDs may be limited. Fidelity currently makes a market in the CDs we make available, but may not do so in the future.
Coverage limits- FDIC insurance only covers the principal amount of the CD and any accrued interest. In some cases, CDs may be purchased on the secondary market at a price that reflects a premium to their principal value. This premium is ineligible for FDIC insurance. More generally, FDIC insurance limits apply to aggregate amounts on deposit, per account, at each covered institution. Investors should consider the extent to which other accounts, deposits or accrued interest may exceed applicable FDIC limits. For more information on the FDIC and its insurance coverage visit www.fdic.gov.
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The analysis on these pages may be based, in part, on historical returns for periods prior to the class's actual inception. Generally, these calculated returns reflect the historical performance of an older share class of the fund, which (for non-Fidelity funds) is adjusted to reflect the fees and expenses of the newer share class (when the newer share class's fees and expenses are higher). Pre-inception returns are not actual returns and return calculation methodologies utilized by Morningstar, other entities and the funds may differ. Pre-inception returns generally will be replaced by the actual returns of the newer share class over time. Please click on dedicated web page or refer to your fund prospectus for specific information regarding fees, expenses and returns.
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