Q. Is a six-month Certificate of Deposit a good for investing cash? Also if I bought an I Bond for $10,000 and kept it for one year, what would I get in interest?
— Cash investor
A. As we’ve all seen, interest rates have steadily risen in the last year and are at levels not seen in over 15 years.
At the same time, some bank accounts are yielding very low rates, some near 0%, so if you have cash set aside for emergencies or near term objectives you will want to look for alternatives.
There are options such as certificates of deposits, money market funds, U.S. Treasury Bills and I Bonds, all with interest rates as much as 5% or more, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York.
Each has benefits and drawbacks but may be suitable depending on your objectives, he said.
Certificates of deposits (CDs) are mostly offered by banks and have various terms, from a few months to a few years, Panambur said.
“Normally, the higher the term the higher the interest rate but you are locked in for the term. If you redeem before the maturity date, there is a penalty which usually is a loss of some interest,” he said. “Make sure the CD you invest in is FDIC-insured for extra protection.”
Money market funds are purchased in brokerage accounts and are liquid in that they can be purchased and sold daily, he said. There are several kinds of money market funds depending on what they invest in, such as U.S. Treasury instruments, corporate instruments or municipal bonds, he said.
While picking a money market fund you will want to consider factors such as the quality of the underlying assets, the yield and the fees, he said.
Panambur said U.S. Treasury Bills have maturities ranging from 4 weeks to 52 weeks. You can purchase them in a brokerage account or directly from the U.S. Treasury at www.treasurydirect.gov.
“These bills are very liquid and can be sold anytime but they are marked to market and their value changes depending on market conditions,” he said. “Interest on treasury bills is exempt from state and local taxes.”
Now let’s look at I Bonds.
These bonds have a fixed rate, currently at 0.4%, and an inflation adjustment, currently at 3.24% for six months. These rates are announced every six months, in May and November. If you purchase I Bonds today, you will get an annualized rate of 6.89% for the first six months and the rate announced in May 2023 for the next six months, he said.
“These bonds cannot be redeemed for the first one year and then, between the second and fifth year, you lose three month’s interest if you redeem. So if you hold it for one year and then redeem you will effectively get nine month’s interest,” he said. “Like U.S. Treasury Bills, the interest on I Savings Bonds are exempt from state and local taxes. Depending on your income, the interest may also be free of federal taxes if used for qualified education purposes.”
So are the investments you mention good ones? It depends on your goals for the money. Be sure to shop around and understand any fees, including early withdrawal penalties, before you make a decision.