Investing your money in an investment or a brokerage account can bring you substantial gains over time, but at the same time they remain risky to the point that you could lose all your money, provided a series of factors come into play.
If you are someone who intends to grow their money in a more moderate way, you can put it into one of the most popular savings accounts, although, as with all things in life, there are certain pros and cons to consider in order to choose the option that best fits your needs, as The Balance notes.
Bank Savings Account
A bank savings account does pay a yield, but it is very modest—roughly 0.06% interest on deposits under $100,000 in the account. But there are also online bank savings options that offer competitive rates around 1% APY.
Pros:
- Easy to open: minimum opening deposits are typically low and you can have several accounts.
- FDIC insured: if the bank fails and they cannot recover your money, the Federal Deposit Insurance Corporation insures deposits up to $250,000.
- Easy access to funds: they have few restrictions on accessing your money. In some accounts, you can withdraw money up to six times per month; if you exceed, you may be charged a fee.
- Ideal for emergency savings: they are ideal for emergency funds for unexpected life events, such as job loss or a prolonged illness.
Cons:
- Low interest rates don’t keep up with inflation: since there is no risk in this type of account, the reward is really small.
- Fees are not fixed: high-yield accounts have variable rates, so just as they can rise, the safest is that they decline.
- Taxes owed on accrued interest: although you should know whether you owe taxes on the interest your money earns, it only applies when you earn $10 or more in interest per year.
Certificates of Deposit (CDs)
It is one of the safest investment systems that exist. The investments made are not high risk, but they yield higher returns than a savings account. Usually you can open an account starting from $500 or $1,000.
Pros:
- Insured up to $250,000 per issuer: they are also insured by the FDIC and the National Credit Union Administration (NCUA). You can hold several CDs issued by different banks and all will be protected.
- Higher interest rates: depending on the term length of your CD you can have from 0.06% and 0.56% APY up to 2.00% APY. The longer your term, the higher the yield.
- Variety of terms, including no-penalty CDs: when you buy a CD, look online banks and credit unions, which often have higher CD rates than traditional institutions, and consider when you’ll need access to that money to choose the right term length. You can review options for a no-penalty CD.
Cons:
- Withdrawal penalties: if you put all your money into a long-term CD and then need it back at any time, you’ll have to pay an early withdrawal penalty. The penalty could be as small as one month of interest or up to 12 months of interest, depending on the CD term.
- You need to move quickly to lock in the best rates: CD interest rates can change overnight. If you’re considering opening a CD today, it’s important to know that if you wait, that rate may not be available tomorrow.
- CDs can be called early: beware of any special features of the CD before buying. For example, if a CD is “callable,” a bank might redeem it before maturity if it wishes. Generally, these callable CDs pay a higher interest rate because there is no guarantee you’ll receive that rate until the maturity date.
U.S. Treasury Securities
According to The Balance, the United States government has what is called “full faith and credit” for its ability to reimburse investors for the securities issued. Investments issued by the U.S. government are considered very safe, since the government can always sell more securities, collect taxes, or print more money.
The securities issued by the U.S. Treasury include Series EE/E Savings Bonds, or I Savings Bonds, as well as inflation-protected securities, Treasury bonds, notes, and bills.
Pros:
- Invest directly for as little as $25: you can open an account directly on the Treasury’s website, investing as little as $25 in Savings Bonds and as little as $10.
- Wide variety of investments available: bonds, notes and bills, U.S. Savings Bonds, and inflation-protected Treasury securities (TIPS).
- High demand for U.S. Treasury bonds: people want to own this type of investment due to its high degree of safety, so there are always opportunities to sell your U.S. government investments.
- No state or local taxes on accrued interest: interest on Treasury securities is exempt from state and local income taxes.
Cons:
- Low interest rates: due to their perceived safety, the yield on your investment is low, though the rate varies depending on the security you choose.
- Some maximum limits: some securities have maximums. For example, with Series I Savings Bonds, which tend to have higher rates compared with other U.S. Treasury securities, you can only purchase a maximum of $10,000 per year.
- Sensitive to inflation and interest rates: as government bonds, rising inflation and increasing interest rates have varying effects on the different types of government bonds.
- Subject to federal income taxes: while you won’t pay state or local taxes, government-issued securities are subject to federal income taxes. However, some of these taxes may be deferred.
You may also be interested in:
- What is a brokerage account and how to open one to start investing in stocks
- Basic points on how to get started in the world of stock investing
- The 5 online savings accounts with the best yields in the United States
