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Hoping to build up your savings? The amount of risk you take is likely to have a large impact on the size of your reward.
If you want the highest return possible on your money, you should probably look to stocks, especially index funds. But high-reward assets are also high-risk. Stocks can plunge, taking most of your money with them.
On the other hand, you can lower your risk substantially by parking your money in safer financial vehicles, such as CDs or savings accounts. You’ll almost surely get a smaller return than you would by investing in stocks, but rates on these safer instruments have been climbing, thanks to the steadily rising federal funds rate.
The direction of the Federal Reserve’s benchmark rate has a large impact on savings rates. When the federal funds rate rises, so do savings rates. And after sitting at rock-bottom for seven years, the federal funds rate has risen by 1.75 percentage points in the past 2½ years.
Of course, inflation has also been rising, including by 2.9 percent over the past 12 months based on the latest Consumer Price Index data. That makes it even more important that your savings earn the best possible interest rate.
In this economic environment, the following financial products are among your best bets for trying to beat inflation without risk:
1. High-yield savings accounts
Savings account interest rates may not beat inflation, but they’re now higher than they have been for years.
According to Money Talks News’ account search tool, which you can use to shop around for the best rate, savings accounts now pay as much as 1.85 percent. And you can earn that rate with an opening deposit of as little as $100.
To avoid risk, choose a savings account that the Federal Deposit Insurance Corp. insures. FDIC insurance is backed by the full faith and credit of the federal government. You can find FDIC-insured institutions using the FDIC’s BankFind tool.
To learn more about how much you stand to profit by switching banks, check out “A Single Change Boosted My Savings Account Rate by 413 Percent.”
2. Certificates of deposit (CDs)
A CD can bring you closer to keeping pace with inflation. Several institutions now offer CD interest rates of more than 2 percent, according to the Money Talks News account tool.
Again, choose a CD offered by an FDIC-insured institution.
Also, be wary of locking up your money for an extended period of time. If the federal funds rate continues to climb — as is widely expected — CD rates will also continue to climb. So, if you buy a longer-term CD and the bank raises its interest rates during that time, you would likely be stuck with the lower rate the bank offered at the time you got the CD.
You can get around this downside of CDs by choosing a shorter-term CD, or looking for a CD that enables you to change the interest rate during the course of the CD term.
Good old Treasurys are about as risk-free as investing gets. Treasury bills, notes and bonds are all basically loans to Uncle Sam, so they carry the full backing of the federal government.
Their rates aren’t too shabby right now, either. As of Friday, they ranged from a yield of 1.87 percent for a one-month Treasury bill to 2.94 percent for a 30-year Treasury bond.
What’s your favorite financial product for earning risk-free interest? Share with us by commenting below or over on our Facebook page.