Best High Yield Savings Options: CDs, Money Market Funds & T-Bills
Inflation continues to erode the purchasing power of your money, making it crucial to find safe and effective ways to grow your savings. In this post, we explore several risk-free investment vehicles offering attractive returns, including Vanguard money market funds, online savings accounts, Certificates of Deposit (CDs), and U.S. Treasury bills. Whether you’re parking cash temporarily or seeking secure income streams, these options can help you maximize your interest earnings while minimizing risk.
Understanding the Impact of Inflation on Savings
Why Savers Are Losing to Inflation
Inflation reduces the real value of your money over time. If the interest earned on your savings is less than the inflation rate, your purchasing power diminishes, effectively causing you to lose money. For example, if inflation is 4% but your savings account yields only 1%, your money’s real value is declining by 3% annually.
The Need for Higher Yield, Low-Risk Options
With traditional savings accounts offering low interest rates, many investors are searching for alternatives that provide better returns without taking on excessive risk. The good news is that several financial products now offer yields ranging from about 4% to over 5%, which can help you at least keep pace with inflation or beat it.
Vanguard Money Market Funds: Convenient & Competitive
What is a Vanguard Money Market Fund?
Vanguard’s money market funds, such as the Vanguard Federal Money Market Fund (ticker: VMFXX), invest in high-quality, short-term U.S. government securities. These mutual funds are open-ended and designed to preserve capital while generating income.
Current Yields and Expense Ratio
As of now, VMFXX offers a 7-day SEC yield of approximately 4.52%, with a low expense ratio of just 0.11%. This means most of the interest you earn remains yours, after fund management fees.
Who Should Consider Vanguard Money Market Funds?
Typically, investors use these funds to park cash temporarily within their brokerage accounts when not actively investing. There’s a minimum investment of $3,000, making it accessible for many retail investors. It’s ideal if you want liquidity, safety, and a better yield than a traditional savings account.
Historical Performance and Benchmarking
VMFXX benchmarks against the Citigroup 3-month U.S. Treasury bill index and has historically averaged around 3.88% since inception in 1981. However, yields have been much lower during periods of low federal interest rates, such as the past decade.
High-Yield Online Savings Accounts: Third Federal Bank Example
Why Consider Online Banks?
Online banks typically offer higher interest rates than traditional brick-and-mortar banks due to lower overhead costs. They provide FDIC insurance, ensuring your deposits are safe up to $250,000 per depositor.
Third Federal Bank’s Online Savings Plus Account
Third Federal, a reputable bank primarily in Ohio and Florida, currently offers an APY of 4.3% on its Online Savings Plus account. This account requires a minimum deposit of $5,000 but comes with no monthly fees or transaction limits.
Benefits and Drawbacks
- Benefits: High APY, FDIC insured, no fees, no transaction limits, and easy online management.
- Drawbacks: No physical branches required for account opening, minimum deposit needed to earn interest.
How to Find Similar Offers
Websites like Bankrate.com can help you compare rates from various online banks and credit unions, enabling you to find the best savings rates available nationwide.
Certificates of Deposit (CDs): Capital One’s 5% APY CD
What Is a Certificate of Deposit?
A CD is a fixed-term deposit where your money is locked in for a specified period, earning a guaranteed interest rate. Early withdrawal usually incurs penalties.
Capital One’s 11-Month CD at 5% APY
Capital One currently offers an 11-month CD with a 5% APY. This is a notably high rate compared to typical CDs and savings accounts.
How the Yield Works
The interest compounds monthly. For example, a $10,000 deposit would earn about $468 over 11 months, equating to roughly $42.55 per month.
Who Should Use This CD?
This CD is ideal if you have cash you can lock away for nearly a year and want a predictable, risk-free return higher than many short-term savings options.
Considerations for Larger Investments
For investors with substantial cash reserves, such as $500,000, the monthly interest could cover significant expenses like mortgage payments or bills, generating over $23,000 in interest at maturity.
U.S. Treasury Bills: Government-Backed Safety with Competitive Yields
What Are Treasury Bills (T-Bills)?
T-Bills are short-term U.S. government debt securities sold at a discount and mature at face value. They are considered virtually risk-free because they are backed by the full faith and credit of the U.S. government.
Current Yields on T-Bills
Recent auctions show 6-month T-Bills yielding around 5.15% annualized. Though the stated yield is annual, holding periods may be shorter (e.g., 6 months or 8 weeks), so actual interest is proportional to the term.
Example: Real-Life T-Bill Investment
An 8-week T-Bill purchased at a discount might yield about $351 on a $50,000 investment, demonstrating how you effectively “loan” money to the government and receive interest at maturity.
Tax Advantages
Interest earned on T-Bills is exempt from state and local taxes, though federal taxes still apply, enhancing their appeal for tax-conscious investors.
How to Purchase T-Bills
You can buy T-Bills directly through TreasuryDirect.gov or via many brokerage platforms. They offer varying maturities, allowing investors to ladder investments for liquidity and yield optimization.
SaveBetter Platform: Curated High-Yield Options
What is SaveBetter?
SaveBetter is an online platform that aggregates competitive savings products from various regional banks and credit unions, including high-yield savings accounts and CDs.
Key Features
- Savings Accounts: Offers rates above typical online banks, but may require membership or residency restrictions.
- High-Yield CDs: Some offerings feature yields comparable or higher than national banks but with longer lock-in periods, such as 17 months.
- No-Penalty CDs: Allow withdrawals without penalty, offering flexibility with competitive rates.
Considerations
While SaveBetter provides access to some of the best rates, eligibility for some products may be limited by geography or membership, so it’s best suited for those who qualify and want to explore beyond mainstream banks.
Balancing Risk, Liquidity, and Returns
The Risk-Return Tradeoff
Investors must recognize that higher returns typically come with higher risks. The options discussed here prioritize safety, with returns reflecting their lower risk profiles.
Importance of Liquidity
For emergency funds or short-term savings goals, liquidity is key. Money market funds and high-yield savings accounts offer near-instant access to funds, while CDs and T-Bills may require holding periods or penalties for early withdrawal.
Diversification of Cash Holdings
Maintaining a diversified “war chest” across these vehicles can balance earning potential with financial flexibility.
Conclusion: Maximizing Savings in a Low-Interest Environment
If you’re sitting on cash and wary of market volatility, parking your money in risk-free, high-yield options like Vanguard money market funds, online savings accounts, Capital One CDs, or Treasury bills can help you preserve and grow your purchasing power. By carefully choosing the right product based on your time horizon and liquidity needs, you can earn meaningful returns while minimizing risk.
Explore these options today to stay ahead of inflation and make your savings work harder for you.
FAQ
Q1: Are Vanguard money market funds safe?
Yes, they invest in high-quality short-term government securities, making them low-risk with easy access.
Q2: Can I withdraw money from a Capital One CD before maturity?
Early withdrawals usually incur penalties that reduce your interest earnings.
Q3: How do Treasury bills work?
You buy them at a discount and receive the full face value at maturity. The difference is your interest.
Q4: What is the minimum deposit to open these accounts?
Vanguard money market funds require $3,000, Third Federal savings requires $5,000, and Capital One CDs typically start at $1,000.
Q5: Are these returns guaranteed?
While these products are generally considered safe, only FDIC-insured accounts and U.S. Treasury-backed securities have guarantees backed by the government.
By understanding and leveraging these high-yield, low-risk savings alternatives, you can safeguard your money’s value and generate steady income streams—even in uncertain economic times.
