Experts have always recommended that you keep some liquid cash in your investment portfolio not only for meeting emergency fund requirements, but also for achieving short-term goals. In 2017, this has become even more important because it is expected that market volatility will be higher than normal. This way you can avoid selling stocks for meeting your cash requirements when the market is down. The goal of this post is to provide you with some information about the best savings accounts, checking accounts and CDs.
As such, the question asked by investors and traders is where they should keep their savings in 2017, especially when it looks like the Fed might increase the interest rates. Further, the Federal Open Market Committee (FOMC) members have clearly pointed out that they are planning to raise the federal funds rate in a gradual manner based on the expected improvements in economic growth. Last year, the Federal Reserve raised the interest rates only once in December. Keeping these aspects in mind, here are the five recommended smart savings strategies in order to help you can maximize your earnings irrespective of whether interest rates are increased or not in 2017:
#1: High-yield Reward Checking Account
To meet your primary checking requirements, you can switch to what is referred to as a “high-yield reward checking account”. This type of account allows you to earn a significantly better interest rate compared to traditional checking accounts. The interest rates on this type of checking accounts are in the range of 5 percent these days. Most of these checking accounts can be operated without paying any kind of maintenance fees.
However, the riders are that such accounts require you to do debit card purchases every month in order to qualify for the high interest rates that are offered by them. Further, the account balances to become eligible for getting higher interest rates ranges from $5,000 to $50,000. Additionally, requirements such as e-statements and receiving direct deposit are also commonly imposed by them.
The popularity of high-yield reward checking accounts is on the rise as more and more credit unions and banks have started offering them. As a result, you are more likely to find credit unions and banks offering this type of account in your own locality. Further, several credit unions and banks allow you to open reward checking accounts online irrespective of the state in which you live.
#2: Internet Savings Account
Internet savings accounts come with interest rates that are significantly higher than that offered by brick-and-mortar credit unions and banks. Moreover, it has been observed that these savings accounts increase interest rates faster than other financial institutions when the Federal Reserve hikes funds rates.
Typically, you can link an online savings account with any checking account that you have with another credit union or bank. After establishing the link, the online bank will allow you to fund your savings account through electronic money transfer from the checking account.
#3: No Minimum Balance Internet Savings Account
Always look out for an Internet savings account that does not specify any minimum balance requirements. Further, you should also ensure that the online bank provides secure electronic funds transfer. Internet savings accounts that demand minimum balances in order to avoid charging monthly fees often force you to keep more money in your account than you may want, or even have.
In a market environment wherein the interest rates are rising, you may not want to put yourself in a such a situation that your ability to transfer funds to accounts providing higher interest rates are diminished. Some Internet banks are known for making it difficult to move your money electronically. They often keep the transfer limits small so that you can move only a small amount of your money out of the account at a time. It is better to avoid opening accounts with such banks.
#4: Never Ever Give Up On CDs
People often get scared and move away from certificate of deposits or CDs in a market environment in which the interest rates are rising. The do it out of the fear that they will lose something better when the rates go up if they get locked in the yield offered by CDs. However, it is to be borne in mind that the increase in interest rate can be much less than what investors expect. This has been the scenario in 2016. Therefore, parking too much money in highly liquid savings accounts, instead of in CDs, would result in lower earnings by way of interest because CDs often pay more than the savings accounts.
In this regard, one aspect to be kept in mind is that you must establish a CD ladder instead of having just one CD. This means that you should open a number CDs that mature at regular intervals. This is to ensure that you do not wait too long for the next CD to mature. When the interest rates are on the rise, CD ladders provide you with more opportunities as you can roll over the maturing CDs into new high interest rate CDs.
The best CD interest rates often offered by online credit unions and Internet banks. Inn fact, you will be surprised to note that there are a number of credit unions out there on the Internet. This is because many credit unions have made it easy for customers to open accounts. This trend is only likely to continue in 2017.
#5: Look for Five-year CDs
It is a good idea to look for CDs that come with five-year terms and those that charge interest for six months or less as premature withdrawal penalties. CDs that mature in less than five years often do not offer higher rates than some of the best Internet savings accounts. Further, you should be able to close a five-year CD that charges a six month’s interest as early withdrawal penalty before the maturity dats and still earn a better return compared to that many of the top shorter-term CDs provide at maturity.
If the interest rates on the rise, it may be worthwhile closing a CD before maturity and reinvesting the proceeds into a CD that provides a higher rate. This approach makes more sense if the early withdrawal penalty is small.