by Maurie Backman | Jan. 26, 2021
If you're unhappy with today's interest rates (and you should be), here's how to get a better return on your money.
There are various features you might look for when choosing a bank -- great customer service, convenient ATM locations, and competitive interest rates for your savings. In fact, in a recent study by The Ascent, over 91% of respondents said they look for strong interest rates when choosing a bank.
Here's the problem -- these days, savings account interest rates are painfully low across the board. Sure, some banks pay more interest than others, but for the most part, you won't even get a full 1% on the money you keep in savings. If that doesn't sit well with you, that's understandable.
The good news, however, is that you don't need to keep all of your money in a savings account. It's just your emergency fund that needs to be tucked safely away in the bank, where your principal is protected. That's provided you don't have more than $250,000 stashed away (the limit for FDIC insurance), which you probably don't.
Your emergency fund should contain enough money to cover three to six months of essential living expenses. Those include:
It's up to you whether you feel comfortable having three or six months of bills stashed away. If you're secure in your job and don't have dependents, you might aim for the lower end of that range. If you're the sole breadwinner for a family of four, you may want to aim for the higher end. But beyond your emergency fund, here's where you can look at putting your money to generate a better return than what today's savings accounts are paying.
If you don't have access to an employer-sponsored retirement plan, you can look at putting your money into an individual retirement account (IRA). IRAs let you invest your funds for your senior years, and if you load up on stocks, you could easily generate 10 times the return you'll get in a savings account today.
Of course, the only catch is that with an IRA, you can't access your money until age 59 1/2 without incurring penalties. But there's an exception -- if you put your long-term savings into a Roth IRA, you'll get the option to withdraw your principal contributions (not your earnings on those contributions) without penalty. The reason? Traditional IRA contributions go in tax free, but Roth IRA contributions go in on an after-tax basis, so if you withdraw your principal contributions before age 59 1/2, the IRS won't penalize you because it never gave you a tax break in the first place.
If your employer offers a 401(k), it could pay to sign up. Like an IRA, a 401(k) lets you invest your money so it can do a lot better than it would in a savings account. However, many 401(k) plans don't offer a Roth savings option, and like IRAs, if you withdraw funds from a traditional 401(k) before age 59 1/2, you'll get hit with an early withdrawal penalty. On the plus side, though, some employers match worker contributions to a 401(k) to some extent, so if you participate, you could have free money coming your way.
IRAs and 401(k)s let you save for retirement, which is an important thing to do. But if you want the most flexibility with your money while also snagging a higher return on it, then you should consider investing it.
To do so, open a brokerage account and take it from there. Of course, you'll want to be careful with the investments you choose, and you should know that unlike a savings account, with a brokerage account, your principal is not protected, so you could actually end up losing money. But whereas a savings account today won't even pay 1% interest, if you're savvy and lucky enough, you might score a 10% return on your investment in a brokerage account.
While you should definitely keep your emergency fund in a savings account, any money you don't need for that purpose has the potential to earn a higher return. And that's where IRAs, 401(k)s, and brokerage accounts come in.
Of course, you may have noticed that CDs didn't make the list of places to put your money outside a savings account, and that's because today's CD rates aren't much to write home about either. Putting money in an IRA, 401(k), or brokerage account comes with risk, and the former two accounts also come with restrictions. But if your goal is to score a higher return on your money, they're all worth looking at.
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