Four ways to earn more on your savings

Risk and reward go hand in hand, even for short-term savings.

  • Investing in Bonds
  • CDs
  • Money Market Funds
  • Short Duration Bond Funds
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Maybe you’re a virtual money person—committed to credit and debit cards, or transforming your iPhone® into an e-wallet. Or maybe you’re the old-fashioned type, with a fat wallet filled with neatly organized bills. No matter how you spend, cash is likely a key element of your daily routine.

It’s simple

Cash is the simplest asset you own, either in the form of physical money or cash balances in a bank or brokerage account. It’s liquid, meaning it’s unattached and free to do whatever it wants, whenever it wants—just like a single 20-something.

That’s in contrast to an illiquid asset like a house, which can take months to sell to be converted into cash. A dollar bill in your pocket or your mobile account can be spent immediately. Cash can also be put into a variety of savings accounts or investments that not only maintain this liquidity, but also pay interest which can be expressed as yield.

What is yield?

Yield is always shown as an annualized percentage—on bank accounts, CDs, money market mutual funds, and bond mutual funds—and it represents the interest payment relative to the value of the underlying instrument or fund.

Some investments pay a fixed rate of interest—for instance, CDs and individual bonds. Stated yields on a CD or bond indicate that you can expect a specified interest level over a specific period of time. Typically, the interest rate is fixed for the life of the CD or bond. And if you hold on to the investment until the pre-agreed maturity date, you’ll receive the interest payment until the investment matures—provided there is no call feature on the bond. A callable bond may be paid off early by the bond issuer.

The stated yields on bond mutual funds, exchange-traded funds (ETFs), or money market mutual funds can be different from what you get. These yields are reported as of the most recent 30 days in the case of bond funds or ETFs, and seven days for money market funds. They look back in time—and there’s no guarantee that the future yields will be the same. But yield isn’t the end of the story when it comes to the potential return on bonds or bond funds. The value of bonds can go up and down, impacting your total return. In a bond fund, the net asset value (NAV) can rise and fall, the value of the securities in the fund can fluctuate, and the fund may pay distributions. All of those factors go into the total return of the investment.

Bond yield table
9 months 1-year 2-year 3-year 5-year
CDs (New issues) 0.75% 0.75% 1.00% 1.15% 1.50%
Bonds
U.S. Treasury 0.48% 0.54% 0.65% 0.75% 1.50%
Corporate (Aaa/AAA) 0.29% 0.76% 0.90% 0.99% 1.26%
Source: Fidelity.com 7/11/2016.
The yield table categorizes bonds by Moody’s and / or Standard & Poor’s (S&P) rating.

The basic thing to know is that risk and reward go together. To have the chance to earn a higher yield, you may need to take more risk. But you should only take risks that are in line with your time frame for investing and your financial needs. In general, higher yields mean bigger risks.

What are my options for cash?

Most people need to keep some cash on hand, and not just for day-to-day needs or for monthly bills. You also need money you can tap quickly for emergencies or unexpected costs, like a major car repair. You may also need to set aside cash to pay for things that are part of a longer-term need like the security deposit on an apartment or a down payment on a house. For these types of goals, you may not want to invest in something that makes it hard to access or where you might lose some of it if the value goes down.

If you have cash leftover after you have saved an adequate amount in your emergency fund, and also for any anticipated short-term needs or goals, then you have more choices to consider. For these additional cash holdings, you may be able to stand some variability in the value of your investment in exchange for a potentially higher total return.

Whatever your situation, you can still earn a return on your money. You have a range of saving and investment choices with varying degrees of liquidity and yield.

1. High-yield savings accounts

Why they’re good…

Some banks offer high-yield savings accounts, which offer a bump in yield over traditional savings accounts.

Accessing your money is typically easy, but it can vary. Some high-yield savings accounts do not offer ATM cards, so the only way to access your cash is by first transferring to a checking account.

FDIC insurance covers your deposits for up to $250,000 per institution per person per account type.

But…

You may need to go online to find an account that pays a meaningful rate of interest.

There may be monthly fees or a minimum account balance required.

2. Certificates of deposit (CD)

Why they’re good…

Generally, CDs may pay more interest than savings accounts because you agree to leave your money with the bank for a specified period of time. In general, the longer the CD term, the higher the yield you can potentially earn.

CDs are widely available at banks and brokerages. Brokerages aggregate and sell CDs known as brokered CDs from banks across the country allowing you to choose from a variety of yields and maturities. Brokered CDs may be bought and then sold on the secondary market.

FDIC insurance covers your deposits for up to $250,000 per institution per person per account type.

But…

CDs make it a little harder to access your money because part of the deal is that you agree to let the bank keep your deposit for a certain amount of time. You can still access your savings before the CD’s maturity date, but will likely be charged an early withdrawal penalty. The fee can eat up a lot of the interest earned and maybe even dip into the amount you originally invested.

In the case of brokered CDs that brokerage firms like Fidelity offer, there may not be any penalties, but if you sell the securities early you risk not receiving your original deposit, or full principal, back and having to pay a charge for the trade.

Some CDs may require a minimum deposit to earn the highest yields.

3. Money market mutual funds

Why they’re good…

Money market funds offer easy access to your money. Held in your brokerage account, they come with check-writing and ATM card access similar to a savings account.

Interest rate increases will pass through to money market funds quickly. When interest rates in the economy rise, for instance due to a rate increase by the Federal Reserve, the new rates will be reflected in money market yields soon after.

Professional fund managers pick the investments in the fund and focus on minimizing volatility in the net asset value of your shares. While money market mutual funds offered to individuals strive to maintain the value of a share at $1.00, there are no FDIC or other guarantees.

But…

Yields are typically low on money market funds since they invest your cash in a diversified mix of short-term bonds and other types of short-term debt securities.

There may be minimum investment requirements in some cases.

They usually charge fees for investing your cash, just like other types of mutual funds.

As a result of recent regulatory changes, prime and municipal money market funds may not be as liquid as government money market funds during a period of extreme market stress. If many people try to take their money out of non-government money market funds at the same time, there could be a temporary halt on withdrawals or fees imposed on these withdrawals.

4. Short-term bond funds and ETFs

There are higher-yielding options if you are comfortable with more risk and won’t need your money for more than two years. When investing in bond mutual funds or ETFs, you could risk losing principal.

Why they’re good…

Professionals pick the investments in the fund. Many actively managed bond funds and ETFs do professional credit research, portfolio construction, and broad diversification.

But…

Expect fees in exchange for that professional expertise. There could be redemption fees as well as minimums before you can open an account and invest.

The value of your investment can change as the market re-rates the value of the bonds in the fund’s portfolio due to changes to interest rates in the economy. As interest rates rise, the value of existing bonds falls. When rates go down, the value of bonds go up. Unlike an individual bond, you can’t hold a bond fund until maturity so you may see a loss if you sell the fund after a rate increase.

There are plenty of options for generating yield on your cash, but the same risk/reward principles of investing apply: The higher the yield, the greater the risk you are taking on. Whatever you do with your cash, ensure it’s the appropriate product, investment, or deposit for your needs.

Let your money work for you.

Learn more

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Past performance is no guarantee of future results.

Legal disclosure for bond yield table: The yield table categorizes bonds by Moody’s and / or Standard & Poor’s (S&P) rating.
The bond yields displayed represent Yield to Worst and are subject to change and availability.
Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate may be higher or lower than prevailing market rates. The initial rate on a step-rate CD is not the yield to maturity. If your CD has a call provision, which many step-rate CDs do, the decision to call the CD is at the issuer's sole discretion. Also, if the issuer calls the CD, you may obtain a less favorable interest rate upon reinvestment your funds. Fidelity makes no judgment as to the creditworthiness of the issuing institution.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk, liquidity risk, call risk, and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Any fixed income security sold or redeemed prior to maturity may be subject to loss.
For the purposes of FDIC insurance coverage limits, all depository assets of the account holder at the institution issuing the CD will generally be counted toward the aggregate limit (usually $250,000) for each applicable category of account. FDIC insurance does not cover market losses. All the new-issue brokered CDs Fidelity offers are FDIC insured. 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. For details on FDIC insurance limits, visit FDIC.gov.
In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so holding them until maturity to avoid losses caused by price volatility is not possible. Lower-quality debt securities involve greater risk of default or price changes due to potential changes in the credit quality of the issuer.
You could lose money by investing in a money market fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund's sponsor, have no legal obligation to provide financial support to money market funds and you should not expect that the sponsor will provide financial support to the fund at any time.
ETFs are subject to market fluctuation and the risks of their underlying investments. ETFs are subject to management fees and other expenses. Unlike mutual funds, ETF shares are bought and sold at market price, which may be higher or lower than their NAV, and are not individually redeemed from the fund.
Exchange traded products (ETPs) are subject to market volatility and the risks of their underlying securities which may include the risks associated with investing in smaller companies, foreign securities, commodities and fixed income investments. Foreign securities are subject to interest rate, currency-exchange rate, economic and political risk all of which are magnified in emerging markets. ETPs that target a small universe of securities, such as a specific region or market sector are generally subject to greater market volatility as well as the specific risks associated with that sector, region or other focus. ETPs which use derivatives, leverage, or complex investment strategies are subject to additional risks. The return of an index ETP is usually different from that of the index it tracks because of fees, expenses and tracking error. An ETP may trade at a premium or discount to its Net Asset Value (NAV) (or indicative value in the case of ETNs). Each ETP has a unique risk profile which is detailed in its prospectus, offering circular or similar material, which should be considered carefully when making investment decisions.
For the purposes of FDIC insurance coverage limits, all depository assets of the account holder at the institution that issued the CD will generally be counted toward the aggregate limit (usually $250,000) for each applicable category of account. FDIC insurance does not cover market losses. All of the new-issue brokered CDs Fidelity offers are FDIC insured. For details on FDIC insurance limits, see www.fdic.gov.
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.
Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. If sold prior to maturity, CDs may be sold on the secondary market subject to market conditions.
Fidelity makes new-issue CDs available without a separate transaction fee. Fidelity Brokerage Services LLC and National Financial Services LLC receive compensation for participating in the offering as a selling group member or underwriter. Here is the risk disclosure for CDs: 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.
Increases in real interest rates can cause the price of inflation-protected debt securities to decrease. Interest income generated by Treasury bonds and certain securities issued by U.S. territories, possessions, agencies, and instrumentalities is generally exempt from state income tax but is generally subject to federal income and alternative minimum taxes and may be subject to state alternative minimum taxes.
The service marks and trademarks used herein are the property of FMR LLC. Any third-party trademarks or service marks used herein are the property of their respective owners.
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