Certificate of deposit (CD) accounts have long been a staple savings tool at banks. They offer fixed returns for set periods of time. Moreover, in this post, you will get more understanding of the topic of 7 Ways to Get Better Returns Than CDs, and would be best if you read till the end.
However, with the Federal Reserve keeping interest rates near historic lows since 2008, today’s CD rates leave much to be desired. Thankfully, alternatives exist that can bring higher yields.
7 Ways to Get Better Returns Than CDs
While Certificates of Deposit (CDs) offer safety and a guaranteed return, their interest rates are often relatively low. If you’re looking for better returns on your investments, here are seven alternative ways to consider:
1. Online Savings Accounts
Online and high-yield savings accounts frequently offer interest rates surpassing those of brick-and-mortar CD products. The highest rates are currently around 3% APY compared to 1% or less on standard CDs. These accounts keep funds liquid with easy access, unlike locking up money in a CD. Shop around online banks to find the top yields.
2. Money Market Accounts
Money market deposit accounts (MMDAs) pay variable interest closely tied to federal funds rates. Rates fluctuate but trends higher than basic CDs. MMDA rates currently sit around 1% APY typically but have potential to rise as the Fed hikes rates. Required minimum balances range from $1000 to $25,000. Most provide debit cards and check writing privileges.
3. Short-term Bond Funds
Bond mutual funds and ETFs purchase portfolios of fixed income securities with varying maturities. Short-term bond funds focus on debt with maturities under 3 years, providing stability but higher returns than CDs recently. Returns vary but top short-term bond funds have yielded 2-3% over the past year. Easy to purchase through any brokerage account.
4. Peer-to-Peer Lending
Peer-to-peer lending platforms like LendingClub allow investors to fund personal loans to individual borrowers. Investors earn interest on payments from 36-60 month installment loans. Returns vary based on risk levels but average around 5% currently. Offers portfolio diversification from the stock market. The SEC regulates major P2P lending platforms.
5. High-Yield CDs
Smaller credit unions and community banks frequently offer special CD terms with interest rates 1-2% higher than large national banks. These “high-yield CDs” lock in fixed returns just like traditional CDs but with more yield. Typically have $1,000 minimum deposits and 6-24 month terms. Insured up to $250k per institution.
6. Treasury Securities
Purchasing US Treasury bills, notes and bonds directly lets you earn the same rates as large institutions. Treasury securities are guaranteed by the full faith and credit of the US government, making them extremely safe. Current 1-year T-bill rates around 4% make them attractive vs sub-2% traditional CD yields.
7. Index Funds
Stock market index funds provide long-run average annual returns of 8-10%, outpacing CDs substantially. But they involve much higher volatility, with potential for negative returns in any year.appropriate only for long-term goals and higher risk tolerance. Low-cost S&P 500 or total market index funds are simple, diversified options.
Conclusion
While CDs preserve capital, today’s paltry rates make them less appealing for yield. Alternatives like high-yield savings, short-term bonds, P2P lending, and treasuries can bring moderately higher returns with limited risk. Or accept some volatility for higher long-run gains through stocks. Just make sure to match options with your financial objectives, time horizon, and risk tolerance.
Frequently Asked Questions
Are CD alternatives just as safe as bank CDs?
Generally not – CDs are FDIC insured up to $250,000 per institution. Alternatives like bonds, P2P lending, and stocks do carry some risk of losing principal, unlike CDs. Assess your risk tolerance.
What is the best CD alternative for short-term savings?
Online high-yield savings accounts offer liquidity, competitive rates, and no risk to principal. Great option for emergency funds or other savings with < 3 year timeframe.
How do I purchase Treasury securities?
Individual treasuries can be purchased directly through the US TreasuryDirect website. Notes and bonds are available from 1 month to 30 years. Minimum purchase is $100.
Which bond funds pay monthly income like CDs?
“Income funds” invest in bonds focused on regular monthly payouts. Vanguard Short-Term Bond Index Fund (BSV) and Schwab Short-Term Bond Fund (SWJFX) are good options.
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