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After higher yields in 2023, investors are bracing for interest rate cuts that could put a damper on shorter-term savings.
Federal Reserve officials expect three quarter-percentage-point cuts in 2024, according to December meeting minutes released Wednesday. But there’s lingering uncertainty over when, or if, those changes may occur.
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With the Fed policy in limbo, savers have several options to consider for their cash, depending on their goals and timeline, explained Ken Tumin, founder and editor of DepositAccounts, which closely tracks rates.
Here are four of the best options for cash in 2024, according to Tumin and other financial experts.
1. Certificates of deposit
With interest rates in flux, you can lock in a higher yield for 2024 with a certificate of deposit, or CD, Tumin said.
CDs earn interest for a set period. Rates may be higher than savings accounts, but you’ll typically incur a penalty if you need the money before the CD matures.
Currently, the top 1% average rate for one-year CDs is above 5.5%, as of Jan. 4, according to DepositAccounts. But “as we get closer to the Fed rate cut, CDs will start going down,” Tumin said.
As we get closer to the Fed rate cut, CDs will start going down.
Ken Tumin
Founder and editor of DepositAccounts
The average penalty for a one-year CD is three months of interest, according to Tumin. But early withdrawal penalties can be higher, so it’s important to read the fine print.
2. Penalty-free certificates of deposit
If you may need the money in less than one year, you can opt for a penalty-free CD, which can “optimize yield without much work,” Tumin said.
Penalty-free CDs typically offer lower interest than a traditional CD, but you may find one at your current bank with a higher rate than your savings account. Plus, there’s no early withdrawal fee if you need the money before maturity.
3. Treasury bills
Whether you’re saving for short-term or long-term goals, Treasury bills, or T-bills, are a “great place for cash right now,” said certified financial planner Patrick Lach, founder of Lach Financial in Louisville, Kentucky, and assistant professor of finance at Indiana University Southeast.
Backed by the U.S. government, T-bills have terms ranging from one month to one year and can be purchased via TreasuryDirect or a brokerage account and interest isn’t subject to state or local taxes.
How to buy T-bills through TreasuryDirect
1. Log in to your TreasuryDirect account.
2. Click “BuyDirect” in top navigation bar.
3. Choose “Bills” under “Marketable Securities.”
4. Pick your term, auction date, purchase amount and reinvestment (optional).
As of Jan. 4, 1-month and 2-month T-bills were yielding roughly 5.4%. If you’re in the 13% tax bracket in California, your after-tax yield for those T-bills may be equivalent to a CD earning 6.21%, Lach said.
However, T-bills purchased via TreasuryDirect aren’t as liquid as cash held in a savings account or a penalty-free CD. If you want to sell T-bills before maturity, you must keep the asset in TreasuryDirect for at least 45 days before transferring it to your brokerage account. You can learn more about the transfer process here.
4. Money market mutual funds
Money market funds, which are different than money market deposit accounts, are a mutual fund that typically invests in shorter-term, lower-credit-risk debt, like Treasury bills. While money market funds are relatively low risk, your cash won’t have Federal Deposit Insurance Corporation protection.
Currently, some of the largest money market funds are paying roughly 5.5%, as of Jan. 4, according to Crane Data. However, money market yields “follow the Fed closely,” Tumin said. “So when they do cut, you can be pretty assured those will fall very fast.”
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