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Well, it happened. The Fed cut its benchmark interest rate last month and is expected to cut it again at its next meeting. That means we all need to seriously think about where we store the cash we’re saving for rainy days or big purchases.
For many people, certificates of deposit are the safest possible option for safe savings. The problem is that when interest rates fall, certificate deposit rates will follow, but they have already started falling.
Another very safe option is Treasury bills and government bonds. This can be a good choice for many savers, depending on the purpose of their savings and how they will be used. Let’s take a look at both and see which one is best for saving money.
Certificates of Deposit: Advantages and Disadvantages
Certificates of deposit are a great place to store your cash if you want to secure short-term interest rates. Let’s say you’ve saved up some extra money for your child’s college education, and you want to keep it for just a few years. Check out high-yield CDs like the ones recommended by The Ascent.
Because your rate is locked in when you buy a CD, you don’t have to worry about your rate going down or your return being less than expected. Additionally, the FDIC will insure you for up to $250,000 if your bank fails. You can take interest out of your CD, or you can choose to rollback (known as compounding) to make your CD grow even faster.
As of October 1, 2024, the Federal Reserve Bank of St. Louis has measured the average interest rate on 12-month certificates of deposit to be 4.38%, the 24-month rate to be 3.91%, and the 60-month rate to be 3.71%. did. CDs typically compound monthly, so compounding your interest income yields the following benefits each period:
$1,000
$5,000
$10,000
$50,000
12 months (APY 4.38%)
$1,044.69
$5,223.45
$10,446.90
$52,234.50
24 months (3.91% APY)
$1,081.20
$5,406.01
$10,812.01
$54,060.07
60 months (3.71% APY)
$1,203.48
$6,017.38
$12,034.76
$60,173.79
Data source: Author calculations.
If you expect interest rates to continue to fall over time, CDs are a good way to lock in your savings interest. Typically, the longer the lock, the lower the interest rate, but if you choose a shorter CD during a rate cut, your interest rate could fall further than the lock.
If you want your money to grow but can’t keep it tied up forever, CDs may be the best option for you.
Government bonds and government bonds: advantages and disadvantages
If you want to lock in your interest rate for much longer than five years, you can choose Treasury bills or bonds instead. They are essentially the same product, just with different lock lengths. Bonds are medium term investments. Currently, Treasury bonds have a term of 10 years. Bonds are long-term investments and currently offer 20- or 30-year options.
Treasury bonds, or Treasury bonds, are loans made to the U.S. government in exchange for significant interest payments compounded semi-annually. Just like when you buy a CD, when you buy a bond, you lock in the rate, but unlike a CD, you can also sell the bond early without any direct penalty if you need to exit your position. Masu.
There may not be a market for the bond. This means you may not get all your money back when you resell, but depending on the structure of the bond and your appetite, you may be able to get a lot back. Bonds are what they were then.
Another great thing about banknotes and bonds is that they are discounted from their face value when purchased. This means you can buy a $100 bond for $95. This, in addition to the interest received, will result in further growth of your investment.
So if you buy a 10-year, $10,000 Treasury bill for $9,500 with 3.875% interest, you’ll receive $10,000 at maturity and earn interest all the time, which is about $4,700. It should be a dollar. Your total return will be approximately $5,200.
Treasury bills and bonds are perfect for people who can invest in CDs but want a longer term. For example, they are good for saving for retirement. Because the only way they go bankrupt is if the government goes bankrupt, and if that happens, we have an even bigger problem. This can be useful for long-term budgeting if you are living off of the cash you have saved.
Which is better?
There is no clear-cut situation in which CDs and Treasury bills or government bonds are always a better choice. You need to consider your financial goals and how much liquidity you need and for what period.
However, both are great tools for maintaining high interest rates in a declining interest rate environment, allowing you to keep your returns high at a time when everyone is maxing out their high-yield savings accounts.
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