By Chris Taylor
NEW YORK (Reuters) – Cash savers are between a rock and a hard place right now.
Interest rates on typical places to stash money, like savings accounts, are near all-time lows.
Meanwhile, inflation rates are the highest they have been in decades – consumer prices in the United States surged in February to a 7.9% annual growth rate, according to the Labor Department.
That means the purchasing power of your savings is eroding bit by bit every month.
“We are certainly getting more questions about inflation,” says Roger Young, director of thought leadership at Baltimore-based investment managers T. Rowe Price. “We have had the luxury for many years of not having to worry about it, and this is a good reminder that inflation shouldn’t be ignored.”
Cash is the mainstay of short-term savings – perhaps an emergency fund of three to six months’ worth of expenses to cover job loss or car repairs. You might also need money ready if you are saving for a down payment on a house.
But the harsh reality is that there are not a lot of great options for where to keep it. That said, some strategies are smarter than others. Here is what to do with that precious cash:
SAVINGS ACCOUNTS AND CDS
The Federal Reserve has signaled that higher interest rates are in our future to help tamp down inflation, so more attractive rates should start showing up in basic bank offerings like savings accounts. So far, the effects have been marginal.
When personal finance site Bankrate surveyed the best savings account rates for March, top results include Comenity Direct (0.60% annual percentage yield), Barclays Online (0.55%), and Ally Bank Online (0.50%).
Certificates of Deposit offer slightly better returns, although they typically require locking up money for an extended period. The best two-year CDs at the moment include Pentagon Federal Credit Union (1.25%), Live Oak Bank (1.1%) and Popular Direct (1.1%), according to Bankrate.
SHORT-TERM BONDS
In eras of rising rates, long-term bond funds tend to get hit pretty hard. But short-term bond funds can be a useful place to keep your cash – generating more potential return than savings accounts, while offering less risk than longer-duration fixed income.
Among the funds with gold ratings from Chicago-based research firm Morningstar are Vanguard Short-Term Corporate Bond Index (VSTBX), T. Rowe Price Short Duration Income I (TSIDX), and PIMCO Enhanced Low Duration Active ETF (LDUR).
Treasury Inflation-Protected Securities (TIPS), whose principal rises with the inflation rate, offer some shelter. “TIPS are the best of a slew of poor options,” advises Matt Bacon, a financial planner in Gaithersburg, Maryland.
DIVIDEND-PAYING STOCKS
Dividend-paying stocks are worth a look for better yields. The average yield on the S&P 500 is around 1.4%, although you can find many quality companies paying out more than 2 or 3% – many multiples of the rate you will find on savings accounts.
There are a couple of risks, though. The value of the underlying securities can decline at any time, so if you are forced to sell in the short term, you could be in a tight spot. And dividends can be cut by companies in times of trouble, so look to firms that have a long track record of maintaining and increasing payouts, like the so-called Dividend Aristocrats.
HIGH-INTEREST CREDIT CARD DEBT
If your emergency fund is covered, and you have additional cash, there is one place to get a guaranteed return: Paying off high-interest credit card debt. Get rid of a revolving balance on a card that is charging 15% annually, and you can look at it as making a 15% return.
It is a more complicated discussion when talking about paying off mortgages, car loans or student debt, which may be locked in long-term at attractively low rates. But for credit card debt that can spiral out of control, eliminating it with cash reserves is almost always a good idea.
While these are a few ideas to get slightly better returns on your savings, do not go overboard and take on too much risk – which defeats the purpose of having cash in the first place.
“No need to get too fancy with the cash piece of a portfolio,” says financial planner Marco Rimassa of CFE Financial in Katy, Texas. “Especially in this volatile investing environment, cash has a place in most asset allocations as a risk dampener – and is being productive exactly as it is.”
(Editing by Lauren Young and Rosalba O’Brien)
