Q: I want to sock away about $20,000 with virtually no risk of losing principal but with more than a 2% return. CDs are maxing out at less than 2%. Savings accounts are worse. I hear government bonds are good alternatives, but I know nothing about them. Where should I start?
– Norman M.
Although deposit rates are abysmal, to say the least, there are some attractive offers from time to time. For instance, as of July 30, EverBank is offering a very enticing 5-year CD of 2.06% APY, which is leading the market right now. Given EverBank’s history of changing rates rather frequently, this rate is not likely to last long.
As for government bonds, you may want to look into Series I savings bonds, which has a composite interest rate that is partially affected by inflation. The rate on I-bonds changes every six months — the rate increases if the inflation rate increases in the past half year. From May 1, 2013 to Sept. 30, 2013, the composite rate for I-bonds is 1.18%, which is not amazing but there’s the potential for higher returns if inflation picks up.
Series I bonds can only be purchased electronically through TreasuryDirect.gov, with a purchase limit of $10,000 per year per individual. I-bonds cannot be redeemed for one year and an early redemption penalty (equal to the last 3 months in interest) applies for redemptions before five years.
Another option to consider is a rewards checking account, which is likely to pay an extremely competitive interest return up to a certain deposit amount, if you meet the preset qualifications. Typically, banks will require direct deposit, opt-in to electronic statements and about 10 debit card purchases per month to earn the rate.
For example, First Financial Bank, a community bank based in Arkansas, offers a rewards checking account with a 3.00% APY on balances up to $15,000 (the portion of the balance in excess of $15,000 earn 0.25% APY). To earn this rate, customers have to make 12 debit card purchase , enroll and log into online banking, and receive electronic statements every month.
Unlike most other savings alternatives, rewards checking accounts are high maintenance and may require a shift in how you manage your finances. Rewards checking accounts are most often found at community banks.
Savings Rates Report July 2013: Rates Unchanged for Two Months