Putting Your Money to Work
Although a high-interest rate environment comes with pains, it also provides opportunities to make extra money (aka passive income) with your savings. There are many ways to invest your savings, but here are some of my favorite ways these days.
Disclaimer 1: This content is for informational purposes only and not intended as financial advice. Author is also a financial advisor. If you need financial advice, consult a financial advisor. Invest at your own risk.
Disclaimer 2: Author may receive referral bonuses if you sign up for accounts using some of the links in this blog post.
High Yield Savings Account (HYSA)
HYSA is likely the simplest and safest option. It is just a matter of finding the right bank. Many large banks are taking advantage of unsuspecting customers who keep a lot of money in their checking account. Although they offer convenience (perfect for a checking account), they barely pay any interest, even on their savings accounts.
I like using NerdWallet to compare yields and look for promotional offers. I personally like using Discover as it offers a competitive yield, provides excellent customer service, and is a reputable brand. Just make sure the savings account is FDIC insured. This will ensure your savings account is protected up to $250,000, even if the bank goes bankrupt. This can be a great option to park some or all of your savings.
Treasury Bonds
Purchasing treasuries on treasurydirect.gov is more hands-on but generally returns better yields than HYSA. You can purchase U.S. Government bonds directly from the government, cutting out the middle man (*cough* banks *cough*). For the most recent yields offered, check out the auction results for different bonds here.
There are plenty of options like I-Bonds, EE-Bonds, Notes, etc. Given the US is no longer in a high inflation environment and interest rates are expected to fall over the next year, I like to invest in Treasury Bills of varying terms (4 weeks to 52 weeks).
Keep in mind that investing in a Treasury Bill locks up money for the duration of the bill. The bondholder won’t have access to the money in the meantime. Given this, I like to keep 1-6 months of emergency savings in a HYSA and invest some excess cash into Treasury bonds. That way, the emergency savings can hold me over until the Treasury bonds mature.
Using bond ladders can also minimize risk in locking up money in bonds. By breaking up the purchase of bonds over time, some of the bonds will be maturing at regular intervals and will be available to be withdrawn or reinvested (if reinvestments are set up).
Money Market Funds in a Brokerage Account
Brokerage accounts allow one to access many different types of investment products. One such product is a money market account. Companies like Schwab and Fidelity offer money market accounts that yield over 5% these days (as of 2024-02-10). This is great because your money is not locked up, but at the same time, the yield can go up or down meaning the high rate isn’t guaranteed long term.
Another major consideration is money market funds are not FDIC insured. Although funds invest in high-quality low-risk bonds, there is a non-zero chance you’ll lose your money.
If you’d like to sign up for a Schwab account, you can use the referral link here to get a sign-up bonus, depending on how much you deposit.
Bonds in a Brokerage Account
Brokerage accounts also give access to bonds, including corporate bonds. Corporate bonds generally provide higher yield than government bonds, but they have a greater default risk. If a company defaults on its debt, you may not get your money back from the bonds you invested in. I generally stay away from corporate bonds because I don’t know the space well enough to make informed decisions.
Brokerage accounts also allow you to invest in bond funds, but that comes with a different type of risk. Since bond funds and ETFs are liquid (meaning you can buy and sell at any time), the price of each share can fluctuate depending on if interest rates go up or down (i.e. interest rate risk). This is because if the interest rates go up, the value of the bonds in the fund go down and vice versa. In summary, bond funds allow you to buy and sell whenever but at the risk of selling at a loss.
Certificates of Deposits (CDs)
Banks sell a product called Certificates of Deposits, where they borrow some of your money for a period of time in return for some interest income. They generally provide a higher yield than a savings account, but you do not have access to the principal balance until the term of the CD expires. This can be a convenient option to keep money within one institution (by having a savings, checking, and CDs all with one bank).
CD’s generally don’t offer as good of a rate as treasury bonds. Just be careful if the CD is callable. That means the bank can close out a high-paying CD before the term ends if interest rates become lower.
Disclaimer: Author may earn referral bonuses if you sign up for accounts using links in this post. I have to keep the lights on somehow!
Conclusion
There are many options to invest your money. I like to take a hybrid approach of utilizing multiple options to take advantage of their positive attributes while reducing some of the risks they come with.
For example, my personal ideal scenario is putting ~3 months of savings into a HYSA. Then, I would invest in US Treasuries with 3-12 months maturity, creating a bond ladder so my bonds mature on a rolling basis and not all at once. This will give me access to the money I need as I need it. Any excess would be split between more HYSA, bond funds, and a money market account. The money in the bond fund and money market account would allow for quick deployment of capital into opportunistic stock investments in my brokerage account.
I hope you find this post informative and entertaining, and I hope you check back regularly for new content!