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As interest rates change, you could earn a higher return for 2024 with a certificate of deposit or CD, Tomin said.
CDs earn interest for a specified period. Rates may be higher than savings accounts, but you'll usually incur a penalty if you need the money before the CD matures.
Currently, the average 1% rate for one-year CDs exceeds 5.5%, as of January 4, according to Deposit accounts. “But as we get closer to a Fed rate cut, CDs will start to fall,” Tomin said.
As we get closer to a Fed rate cut, CDs will start to fall.
Ken Tomin
Founder and Editor of DepositAccounts
The average penalty on a one-year CD is three months of interest, according to Tumin. But penalties for early withdrawal can be higher, so it's important to read the fine print.
If you may need the money in less than one year, you can opt for a penalty-free CD, which can “improve your return without putting in a lot of work,” Tomin said.
Penalty-free CDs typically offer less interest than traditional CDs, but you may find one at your current bank with a higher interest rate than your savings account. Plus, there are no early withdrawal fees if you need the money before the due date.
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 Southeastern.
U.S. government-backed Treasury bills have terms from one month to one year and can be purchased via TreasuryDirect or a brokerage account and interest is not subject to state or local taxes.
How to buy T-bills through TreasureDirect
1. Log in to your TreasureDirect account.
2. Click “BuyDirect” in the top navigation bar.
3. Select “Permissions” under “Marketable Securities.”
4. Choose the duration, auction date, purchase amount and reinvestment (optional).
As of January 4, one-month and two-month Treasury bills were yielding approximately 5.4%. If you're in California's 13% tax bracket, your after-tax return on those Treasury bills could be equivalent to a CD earning 6.21%, Lash said.
However, Treasury bills purchased through TreasuryDirect are not as liquid as cash held in a savings account or penalty-free CD. If you want to sell Treasury bills before maturity, you must hold 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.
Money market mutual funds are another “great option” for cash, said Seth Mulliken, founder of Lattice Financial in Charlotte, North Carolina.
Money market funds, which differ from money market deposit accounts, are mutual funds that typically invest in short-term, low-credit-risk debt, such as Treasury bonds. While money market funds are relatively low-risk, your money will not have the protection of the Federal Deposit Insurance Corporation.
Currently, some of the largest money market funds are paying roughly 5.5%, as of January 4, according to Bloomberg. Crane data. However, money market yields “track the Fed very closely,” Toomin said. “So when they cut, you can be sure they will go down very quickly.”
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