NEW YORK (Reuters) — Cash savers are currently between a rock and a hard place.
Interest rates on typical places to store money, such as savings accounts, are near all-time lows.
Meanwhile, inflation rates are the highest in decades – consumer prices in the United States jumped in February to an annual growth rate of 7.9%, according to the Labor Department.
This means that the purchasing power of your savings is gradually eroding each month.
“We definitely get more questions about inflation,” says Roger Young, director of thought leadership at Baltimore-based investment manager T. Rowe Price. “We’ve had the luxury for many years of not having to worry about it, and it’s a good reminder that inflation shouldn’t be ignored.”
Cash is the mainstay of short-term savings – perhaps an emergency fund for three to six months of expenses to cover job loss or car repairs. You might also need money if you’re saving for a down payment on a house.
But the harsh reality is that there aren’t many great options for where to keep it. That said, some strategies are smarter than others. Here’s what to do with that precious cash:
Savings accounts and CDs
The Federal Reserve has signaled that higher interest rates are in the future to help curb inflation, so more attractive rates should start appearing in basic banking offerings like savings accounts. So far, the effects have been marginal.
When personal finance site Bankrate polled the best savings account rates for March, top results included Comenity Direct (0.60% annual percentage return), Barclays Online (0.55%) and Ally Bank Online (0.50%).
Certificates of deposit offer slightly better returns, although they generally require you to lock up money for an extended period. The top two-year CDs right now include Pentagon Federal Credit Union (1.25%), Live Oak Bank (1.1%) and Popular Direct (1.1%), according to Bankrate.
In times of rising rates, long-term bond funds tend to be hit hard. But short-term bond funds can be a useful place to keep your money. — generating more potential return than savings accounts, while offering less risk than longer duration fixed income securities.
Among the funds rated gold by Chicago-based research firm Morningstar are the Vanguard Short-Term Corporate Bond Index, T. Rowe Price Short Duration Income I and PIMCO Enhanced Low Duration Active ETF.
Treasury Inflation-Protected Securities or TIPS, whose principal increases with the rate of inflation, provide some shelter. “ADVICE is the best of a multitude of mediocre options,” advises Matt Bacon, a financial planner in Gaithersburg, Maryland.
Dividend-paying stocks are worth pursuing for better returns. The average return on the S&P 500 is around 1.4%, although you can find many quality companies paying more than 2 or 3% – many multiples of the rate you’ll find on savings accounts.
However, there are some risks. The value of the underlying securities can fall at any time, so if you are forced to sell in the short term, you could find yourself in a difficult situation. And dividends can be cut by companies in times of trouble, so look at companies that have a long track record of maintaining and increasing payouts, like the so-called dividend aristocrats.
High Interest Credit Card Debt
If your emergency fund is covered and you have extra cash, there’s only one place to get a guaranteed return: Paying off high-interest credit card debt. Get rid of a revolving balance on a card that charges 15% per year, and you can consider it making a 15% return.
It’s a more complicated discussion when it comes to paying off mortgages, car loans or student debt, which can be locked in for the long term at attractive rates. But for credit card debt that can spiral out of control, eliminating it with cash reserves is almost always a good idea.
While these are some ideas for getting slightly better returns on your savings, don’t go overboard and take on too much risk – which defeats the purpose of having money first. location.
“There’s no need to get too fancy with the cash portion of a wallet,” says financial planner Marco Rimassa of CFE Financial in Katy, Texas. “Particularly in this volatile investing environment, cash has a place in most asset allocations as a risk buffer – and is productive just as it is.”