Where Can I get a Good Return on “Safe” Money?

A common question I get from clients, looking to maximize how their money is working for them is, what can I do with my “safe” money so that it makes a little money.

For years, we’ve been an interest rate desert when it comes to safe money. While rock-bottom interest rates have been exceptionally good for borrowers, for folks trying to make any money on their savings without jeopardizing their principal investment, it’s been hard to find good places to put safe money that promised any worthwhile rate of return.

With inflation and interest rates rising, that’s starting to change. Still even some of the safest investments out there are not necessarily the right place for what you consider safe money. So, before we discuss where to put it, let’s first discuss the questions you need to answer about your funds.

1) What is my time horizon for needing these funds?

For true emergency funds, the time horizon should be considered tomorrow. They are there for something you can’t see coming – you don’t know what it is, and you don’t know when it will happen. On the other hand, some safe funds have a longer timeline. Down-payment savings for a house you plan to buy or remodel in a year or two, or a vacation you plan to take a few years down the road. Part of understanding where to put your money involves defining the earliest date at which you’ll need to use the funds. Without knowing this, it’s simply impossible to find the best location for them.

2) Do I have any tolerance for loss of the principal value that I have invested?

To me, safe money means money I don’t want to lose, period. For others, safe money may mean money where some fluctuation in value is tolerable, as long as it doesn’t fluctuate too much. This post will focus on options for money you don’t want to lose. For funds where you have more tolerance for principal fluctuation, you may be able to find better returning products with a bit more risk involved, but this is probably not the place to find those.

Once you know your time horizon, it’s easier to examine the options out there and find the ones that are best for you.

For Money you Could Need Tomorrow

A high yield savings account or a money market account is going to offer the best return on these funds, while keeping them available and easily accessible to you. There was a time (in the pre-online banking days) where a money market fund would always outperform a savings account in terms of interest rates, but in the current era of high-yield, online savings accounts, that is generally no longer the case. These days, the two offer similar interest rates, and high-yield savings accounts are more available to folks with lower account balances.

Sites like NerdWallet and Bankrate typically publish up to date lists of who is offering the best rates for high-yield savings accounts – and these are not going to be found at traditional banks. Almost all banks offering competitive high yield savings options are online banks. Look for one with no minimum account balance and no additional account or maintenance fees.

For Money with a 3-9 Month Timeline

A 3, 6, or 9 month CD will likely get you a bit more than a high-yield savings account and may be worth the trouble of pursuing a higher return. Again, your best bet in finding the highest yielding CDs will be to look at online banks (and NerdWallet and Bankrate can help you out here also, with an up-to-date list of who is offering the highest rates).

Another alternative would be to look at buying brokered CDs in an investment account. This strategy allows you to open one account and shop around for CD rates (and buy CDs) from different banks in a single account. Brokered CDs are similar to bank CDs in many ways and will always return your principal plus interest if held to maturity. The main difference is that prior to maturity, brokered CDs can only be cashed in by selling them on the secondary market. As a result, the consequence for not holding a brokered CD to maturity is that you may be required to sell if for less than you purchased it for. So, if that’s the route you plan to pursue, make sure your timeline lines up to the maturity date on the CD to ensure that you are not forced to sell your CDs prior to maturity for less than they are worth.

For money that can be held for 1-5 years

Though not universally true in any time frame, in 2022, if you haven’t maxed out what you’ve put into Series I Savings Bonds ($10,000 per year, per person) through the U.S. Treasury, you’re missing a good opportunity to put your safe money to work. Series I Savings Bonds have an interest rate linked to the inflation rate, which, as of September 2022, is 9.62%. The rate adjusts every 6 months based on the current inflation rate, so in low inflationary periods, Series I bonds are not a popular vehicle for safe money, but right now, with inflation rates high, this is a good way to ensure principal preservation and make a decent interest rate.

The catch? In order to access the money completely penalty free, you need to wait at least 5 years. But at any point after one year, you can cash out your Series I Bonds for the full principal value back – you’ll just forfeit 3 months of interest if you cash in before the 5 year mark. You also don’t need $10,000 to start, you can buy a Series I Savings Bond with as little as $25. Just remember, this is not the place for money you might need in less than a year.

How Important is a Good Return on Safe Money?

It’s NOT more important than keeping it safe – so don’t overthink your safe money. Right now, there are some opportunities to make a bit of money on safe funds, but in times when those opportunities don’t exist, it’s not worth taking on a ton of risk to try and get a better return on your safe funds.

Also, if a 3, 6, or 9 month CD is more work than you want to do, it’s okay to just keep that money in a high yield savings account. The hassle of the slightly higher yielding product may not be worth it to you.

After all, the purpose of safe money isn’t to make money, it’s to protect you from having to use high-interest debt when things go wrong, and to allow your other money to work in riskier and higher returning investments without having to access it in unexpected times of need. So, get the return you can, but don’t jeopardize the underlying asset trying to max out your return on safe money. That’s simply not what it’s there for.