If the past year has taught us anything, it’s that we need to lower our expectations. Remember when investors assumed they’d earn 10 percent a year on their 401(k) plans? Nowadays, investors are exchanging high fives and fist bumps if they make it through the month without losing money.
Likewise, investors are also learning to lower their expectations for their low-risk investments, such as certificates of deposit and bank savings accounts.
Last week, the average interest rate for a one-year certificate of deposit was 1.37 percent, according to Bankrate.com. Don’t look for improvement anytime soon.
The Federal Reserve Board wants to get the economy moving, and that means keeping interest rates low. At its meeting last week, the Fed said it’s committed to keeping short-term interest rates at zero “for an extended period.”
That doesn’t mean you should take unnecessary risks with your emergency fund or stop saving. Here’s a look at some products that provide above-average rates – along with their drawbacks.
Rewards checking accounts
Some community banks and credit unions, eager to attract deposits, are offering interest rates of 5 percent or more on their checking accounts. You can search for banks and credit unions offering rewards accounts at www.checkingfinder.com.
To get these rates, though, you must follow the rules precisely. Typically, the bank or credit union requires you to set up direct deposit, receive your bank statements online, and use your bank or credit union debit card at least 10 times a month.
If you don’t meet these requirements – maybe you use your debit card nine times, instead of 10 – your interest rate will plummet, says Greg McBride, senior financial analyst for Bankrate.com.
For example, Malvern Federal Savings Bank of Paoli, Pa., offers a 5.01 percent rate on its rewards checking account for accounts of up to $35,000. But if you don’t meet the requirements, the rate on your entire balance will crater to 0.20 percent.
Before opening a rewards checking account, McBride says, read the fine print and make sure the account fits your financial lifestyle.
Brokered CDs
These CDs are sold by brokers, and often pay higher rates than CDs offered directly by banks. As long as the amount you invest in a brokered CD doesn’t exceed deposit limits – currently $250,000 per depositor – your money is insured by the Federal Deposit Insurance Corp.
The downside: If you need to withdraw your money before the CD matures, “You could take a bath,” McBride says. When you redeem a conventional CD before maturity, the bank typically requires you to forfeit some of your interest (see chart above).
When you cash out a brokered CD, the penalty could be much higher. Your broker will need to find another investor to buy your CD, and, “What you get is based on what that investor is willing to pay,” McBride says. You could lose all of your interest and some of your principal, too.
MoneyAisle.com
This new online service allows small and midsize banks to compete for your business through Internet auctions. To get bids, enter the amount you want to deposit, the term of the CD you’d like to buy, and your state of residence. MoneyAisle also allows you to solicit bids for high-yield savings accounts.
You don’t have to register to search for bids. In our test, the best rate offered for a one-year CD with a $5,000 deposit was 2.62 percent.
Investors willing to search the Internet may find even better deals. Bankrate.com lists four banks offering rates of around 2.8 percent. The Bank Deals blog, bankdeals.blogspot.com, provides regular updates on the best rates available at banks and credit unions.
Even the best rates seem like a major comedown from last year, when some banks were paying 4 percent or more on their savings accounts. But, “Inflation is a fraction of what it was a year ago,” McBride says. “Savers are doing better today than they were last summer when interest rates were higher but inflation was through the roof.”
You can get a higher rate by investing in a longer-term CD, but that’s probably not a good strategy, McBride says. The average rate for a five-year CD was 2.27 percent last week, and some banks are offering 3 percent or more. But, “If inflation rebounds, as many expect it to, it can completely devour your return,” he says. And if interest rates rise in the next five years – another good bet – you won’t be able to shift your money to a higher-earning CD without incurring a penalty.