Where to Put Your Safe Savings

Along with mortgages and car loans, savings rates are dramatically higher than anytime in recent history. The last time rates were at this level, Bush The Second was president and we were soon to enter the financial and housing crash of the late aughts.

For younger adults, these interest rates are uncharted territory; for those of us of a certain age, it brings back memories of an earlier era.

What are the low-risk options for your cash savings? You have several, all with slightly different trade-offs for liquidity and convenience. As of early 2024, they all yield somewhere between 4 and 5+% :

1. Bank savings accounts yield less than other options but are the most liquid and convenient.
2. Bank CDs offer a higher yield but are less convenient (you need to search for the best one, open a new account, and remember what to do with it when it comes due) and less liquid (you pay a penalty if you need the money early).
3. US Treasury bills also offer a high yield but they’re inconvenient to buy or to cash-in early. US Treasury securities are exempt from state income taxes and that can save people a few shekels.
4. Money market funds are liquid and convenient (once you have a brokerage account at a place like Fidelity or Vanguard) and returns are similar to Treasury Bills. But, they’re slightly less safe as they have no FDIC guarantee.

If you don’t expect to use the money for a few years but want to ensure the principal is safe:

1. MYGAs are the insurance industry’s version of a bank CD. They typically yield more than a CD of the same term but lack FDIC protection. However, they’re illiquid and inconvenient as you need to purchase them via an annuity salesperson, maintain a new account with an insurance company, and cannot be redeemed early. They do have more flexible tax treatment as you can defer the interest income until you cash them in. If you’re near retirement and plan to buy a lifetime annuity in a few years, these can be a good option as a bridge until then. Read more here.
2. US Treasury inflation bonds are safe and tax-efficient, but you have to put up with a clunky website, lock up your money for at least one year, and there’s a relatively small limit you can invest each year. These bonds are hard to beat over the long run. Read more here.

There’s no secret strategy (other than don’t leave your funds sitting in a bank account yielding nearly nothing). Short-term rates are, more or less, pegged to Treasury Bills so you shouldn’t see much variation across these various safe options. Also, note that “short-term” rates are just that — they’re not guaranteed to remain there for any period of time.

What do I do? I have some MYGAs, along with a money market fund and some inflation bonds. Years ago, I had CDs but found them annoying to manage so I stay away from them now.

The differences are minor across these dimensions of risk, return, liquidity, and convenience. As always in the world of financial services, there are no free lunches — not even free toasters anymore.