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How To Make Your Savings Work Harder For You

Are you tired of not earning anything on your savings? At the current average savings account interest rate of .1%, your savings are losing about 1% a year to inflation. So, what can you do about it? Here are the pros and cons of some options to consider:

Online Savings Account

Interest rate: As of the date of this article, .90% is the highest online savings account rate on Bankrate.

Pros: They’re generally FDIC-insured and can be linked to your checking account for easy transfer back and forth.

Cons: They still don’t earn very much.

Bottom line: This is a great place to start for someone looking to earn a little more interest without jumping through a lot of hoops.

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Series I Savings Bonds

Interest Rate: currently 1.06%.

Pros: These bonds are fully backed by the federal government against default, they do not fluctuate in price, and the rate is periodically adjusted to keep pace with inflation so they’re virtually risk-free. In addition, they’re exempt from state and local taxes, federal taxes on the interest can be deferred and they can be used tax-free for qualified education expenses.

Cons: Each person is limited to purchasing $10k per year electronically at plus another $5k a year of paper bonds with IRS tax refunds. Once you purchase them, you can’t cash them in for the first 12 months and you lose the last 3 months of interest if you cash them out in the first 5 years. To use them tax-free for education, you have to meet income and other requirements.

Bottom line: They can be a great option for anyone who doesn’t need the money in the next year since you’re still ahead of a typical savings account even after the 3-month interest penalty.

Series EE Savings Bonds

Interest Rate: The current rate is only .10%, but they are guaranteed to double in 20 years for an average annualized return of 3.6%.

Pros: They have the same pros as the Series I Savings Bonds (except for the inflation adjustment) but with a possible return of at least 3.6% after 20 years.

Cons: They have the same cons as the Series I Savings Bonds but can’t be purchased in paper form. They also currently have a very low interest rate if not held for the full 20 years.

Bottom Line: They earn a decent return over 20 years for the ultra-conservative portion of your long-term portfolio.

Rewards Checking Accounts

Interest rate: The highest current rate on Deposit Accounts is 4.09% as of the date of this article

Pros: Not only do these FDIC or NCUSIF-insured accounts pay higher interest than most other checking accounts, but many also have no maintenance fees and even reimburse fees charged from using another bank’s ATM.

Cons: The highest rates are offered by small, community institutions that are unlikely to have a branch anywhere near you, so you’ll need to do your banking primarily over the Internet, phone, and mail. To qualify for the higher interest rates and ATM fee reimbursements, you must satisfy certain criteria every month that typically consist of setting up direct deposit, making 10-15 debit card transactions, and receiving electronic statements. There’s also a maximum of typically between $10-25k that can earn that rate.

Bottom line: They can make a lot of sense for someone willing to bank remotely and use their debit card a lot.

Life Insurance Cash Value

Interest rate: varies.

Pros: The interest or dividends may have a guaranteed minimum return, can be steadier than stock returns or interest rates, and can be borrowed tax-free as long as the life insurance policy stays in force.

Cons: You may get a lower return than you expected, you have to pay for life insurance you may not need and the fees can be steep.  

None of these rates may seem too exciting right now, except when you compare them to what you’re currently getting at your local bank. However, these options are also likely to continue paying more when interest rates eventually go back up again. (I personally remember being able to get 6% from a rewards checking account.) By exploring these alternatives now, you can be well-positioned for when the Fed eventually starts raising rates again…

Source: Forbes – Money

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