Generally, it helps to save up to 20-25% of a house’s sales price. However, factors like geographical location, economic climate, real estate interest rates, and global events will influence how much money you’ll need to buy a house.
Key Takeaways:
An ideal down payment is 20% to 25% of a home’s value.
USDA and VA home loans traditionally don’t require down payments.
If you make a down payment below 20%, you may be required to get private mortgage insurance.
How much money do you need to buy a house? That cost depends on numerous factors like inflation and real estate trends. According to the Census, homes sold for a median price of $420,700 in January 2024.
Thankfully, you don’t need to pay off that amount all at once. A down payment that’s 20% to 25% of a home’s value can help you secure a property. Even if you don’t have the funds to make a sizeable down payment, low and no-down-payment mortgage options are available.
Below, we’ll share our expertise to help you learn all about loans and mortgage options. We’ll also answer several common questions and share helpful tools, like Credit.com’s mortgage calculator.
All Costs Associated with Buying a House
Spend enough time shopping around for houses, and you’ll learn very quickly that a property’s sales price isn’t the only expense you’ll have to pay. Below, we’ll cover down payments, earnest money deposits, and other factors that determine the real cost of a home.
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Down Payments for Different Mortgage Options
According to the United States Census Bureau, 661,000 new homes were sold in January 2023. Most homebuyers don’t pay off their properties in full from the get-go. Instead, they cover a portion of the home’s cost with a down payment, then gradually pay off the remaining value via monthly mortgage payments.
“How do home mortgage rates work?” and “What types of mortgages am I eligible for?” are common questions for first-time homebuyers.
Below, we’ll discuss four mortgage options and break down how each of them works.
1. Conventional Mortgage
A conventional loan is a mortgage option that’s offered by a private lender instead of the government. Mortgage companies, credit unions, and banks offer conventional loans, though they might require a down payment between 20% and 25% of a property’s sales price.
Lenders might request that you purchase private mortgage insurance (PMI) if your down payment is less than 20%. PMI reimburses lenders if you don’t make your mortgage payments, and borrowers will have to pay for coverage annually.
2. USDA Mortgage
The United States Department of Agriculture (USDA) offers this unique mortgage to borrowers who live in rural areas. A USDA mortgage has no down payment requirement, and its interest rate is very competitive.
To qualify for a USDA loan, you need to:
Buy an eligible property. Your potential home has to be in an eligible rural area.
Meet income guidelines. To qualify for a USDA loan, your income can’t exceed a state-specific amount.
Use the home as your primary dwelling. You have to live on the property permanently.
Be a U.S. citizen, a U.S. national, or a qualifying resident alien. Foreign nationals not authorized to remain in the United States can’t get USDA loans.
You’ll also need to meet the lender’s credit requirements. On average, a credit score of 620 or more will qualify you for a government-backed USDA loan.
3. FHA Mortgage
The Federal Housing Administration (FHA) offers this distinct government-backed mortgage. Borrowers can secure an FHA mortgage with a down payment as low as 3.5%.
Borrowers with very low credit scores might be eligible for an FHA loan, at the expense of having more strict loan limits and higher up-front costs.
To get an FHA loan, you need to meet the following requirements:
Primary residence. The house associated with your loan must be your primary residence. You can’t rent it out to others for profit.
FHA maximum limit. FHA loans can only apply to properties within a set price range. In 2024, the maximum FHA loan amount is $498,257 for single-family homes.
Debt-to-income ratio. To qualify for an FHA loan, you must spend a maximum of 43% of your income on housing costs and housing-related debt.
4. VA Home Loans
Veterans Affairs (VA) loans offer low credit requirements and come with no down payment restrictions.
Certain people qualify for VA loans, including:
Service members who’ve served for at least 90 days consecutively.
Veterans who’ve served at least 181 continuous days, depending on their deployment date.
National Guard members with six years of Active Reserve status or 90 consecutive days of active duty service.
Surviving spouses of veterans, including veterans who are missing in action or being held as a prisoner of war (POW).
Earnest Money Deposit
An earnest money deposit is a payment that buyers can place to demonstrate how serious they are about obtaining a property. Earnest money deposits are normally between 1% and 3% of a property’s sales price. This deposit is not the same as a down payment.
When you make an earnest money deposit, those funds are put into an escrow account. If the seller of a property closes on a deal with you, your earnest money deposit is then added to your down payment. If the seller doesn’t close on the deal with you, it’s possible to regain your earnest money deposit if contingencies are set in place.
Several common contingencies include:
Home inspection contingency: Buyers request to have an inspection conducted on a property. If problems are discovered, buyers can back out of a deal.
Home sale contingency: Buyers who might need to sell their current home can ask for extra time.
Insurance contingency: This is for buyers who may need time to obtain home insurance for a property.
Closing Costs
Closing costs include taxes, appraisals, home inspection costs, title costs, and attorney fees. They’re generally between 3% and 6% of your mortgage principal. Your mortgage principal is the amount you borrow—so the bigger your down payment, the less you’ll pay in closing costs.
Let’s use the $200,000 home above as an example. Consider these three 4% closing cost scenarios:
Your down payment is 10%, or $20,000, leaving a mortgage principal of $180,000. Your closing costs will roughly amount to $7,200.
You offer20%, or $40,000, as your down payment. Your mortgage principal is $160,000, and you’ll pay $6,400 in closing costs.
You apply for a mortgage with no down payment, so your mortgage principal is $200,000. Ultimately, you’ll pay $8,000 in closing costs.
Home-Buying Examples
Next, we’ll show you how to determine your down payment on a home with the previous loans as examples. Let’s imagine your dream home is on the market for $200,000.
Down payments for conventional mortgages are usually $10,000 – $40,000.
USDA mortgages normally don’t require down payments.
An FHA mortgage can cost as little as $7,000.
A VA home loan also doesn’t require a down payment.
USDA and VA home loan mortgage options have the lowest up-front costs for eligible borrowers. An FHA mortgage is less costly than a conventional loan, but interest rates will affect your total payments in the long term.
Financial Resource Ideas
Making a down payment can be challenging because you need a paper trail of your purchases. In most cases, you can’t use borrowed money for a down payment.
Conversely, we know several creative ways to come up with a down payment:
Profits earned from stock or bond sales
Filing for an IRA or 401(k) withdrawal
Paying with money from your checking or savings account
Cash earned from a money market account
Using funds from your retirement account
Monetary gifts
You can roll other funds, like your tax return or a security deposit refund, into your down payment, too.
How Much Money Should I Save Before Buying a House?
It’s important to look at the big picture when buying a house. You’ll need to pull together a down payment and closing costs, but you’ll also need to budget for removal costs, inspections, and repair fees.
A tool like a monthly budget template can put your common expenses into perspective and help you better understand how much house you can afford with your current income.
When Should I Seek Mortgage Relief?
“What happens if I miss a mortgage payment?” is another concern for new and long-time homeowners. First, know that your home won’t immediately be foreclosed on if you miss a payment. Foreclosure usually isn’t imminent unless you’ve missed two or three payments.
If your mortgage payments aren’t within reach, you can contact your lender and explain your specific situation. Seeking forbearance, which is a temporary pause on your payments, can also help you regain your bearings.
Prepare to Buy a Home with Credit.com
Knowing your credit score and understanding the elements that affect it can help you know what you need to do to prepare for loan opportunities.
Sign up for Credit.com’s ExtraCredit® subscription to check out 28 of your FICO® scores. Afterward, visit our mortgage rates page to get additional information.
If you’re wondering, “Can you write a check from a savings account?” the short answer is no. You can’t write checks from a savings account; instead, you can do so from a checking account, which is designed to provide that specific financial service. Savings accounts are primarily for earning interest on your deposits and transferring money occasionally.
Checks might seem like an old-fashioned payment method, but they are vital in specific transactions. For instance, you might need to pay the deposit for an apartment rental by check. In addition, personal checks are more secure for mailing payments than cash.
While you may want to draw funds from a savings account, that’s really not its purpose. Here, you’ll learn the details on this situation and also a possible work-around or two.
Key Points
• Writing checks from a savings account is not possible; it can only be done from a checking account.
• Savings accounts are primarily for earning interest and occasional money transfers, not for check-writing.
• Checks are still important for certain transactions, such as apartment rental deposits and secure mailing of payments.
• Savings accounts are designed for saving money, earning interest, and providing security for future needs.
• While payments cannot be made directly from a savings account using checks, automatic transfers and mobile banking can be used for certain transactions.
Why You Can’t Write Checks from a Savings Account?
You can’t write checks from a savings account because these accounts are for earning interest on cash you leave alone. Federal law, in fact, prohibits check-writing from such accounts and may restrict how often you can transfer money out of a savings account, too.
Part of the way a bank makes money is to lend out your funds on deposit in a savings account for other purposes. You earn an annual percentage yield, or APY, on your deposit for giving the bank the privilege of using your money that’s in a savings account. In other words, your financial institution is depending on some savings-account money staying put, not being regularly transferred out via checks.
Checking accounts, however, are designed to allow customers to write checks and make purchases. They may not make much or any interest, but you can move your money out of these accounts via checks and electronic transfers. You can even write a check to yourself to access your money.
Get up to $300 when you bank with SoFi.
Open a SoFi Checking and Savings Account with direct deposit and get up to a $300 cash bonus. Plus, get up to 4.60% APY on your cash!
What Accounts Can You Write a Check From?
One of the ways that checking accounts vs. savings accounts differ is that you can’t write checks from a savings account. However, both checking accounts and money market accounts can let you move funds out via checks. You can choose from the following types:
• Standard checking. This account typically provides a checkbook and debit card to make purchases. You might earn meager or no interest, but you can access your cash quickly. And, as with most kinds of checking accounts, you’ll be able to get cashier’s checks and certified checks if needed.
• Premium checking. This is a checking account on steroids, with better interest rates, rewards programs, and customer perks. In addition, these accounts might have monthly fees or steep minimum balance requirements in order to get those enhanced benefits, so check your customer agreement carefully.
• Rewards checking. Think of rewards checking as akin to a premium checking account but focuses on providing cash back for debit card usage. Again, it’s crucial to read the fine print for these accounts, as they usually require specific spending habits to be worthwhile.
• High-interest checking. This kind of account, also known as high-yield checking, blends saving and checking together by providing higher interest rates while allowing you to write checks and use your debit card.
While this account attempts to provide the best of both worlds, you’ll likely receive a lower interest rate than a savings account. You also might have to fulfill strict requirements (such as a monthly high account balance or transaction count).
• Student checking. High school and college students can access banking through these accounts. Student checking accounts typically provide leniency for overdrafts and promotional rewards for new customers. However, your account will change to a standard checking account when you lose student status, meaning you may lose the advantages of a student account.
• Second chance checking. Customers with less than perfect banking histories can struggle to find a bank that will provide them with an account. Unpaid bank fees and repeated overdrafts can cast a shadow over your banking record, making financial institutions hesitant to work with you. Fortunately, numerous institutions offer second chance checking to give customers another shot at banking. These accounts might restrict spending or charge monthly fees to cover their risk but can help you get back on your feet.
• Money market account. Many money market accounts also combine some of the features of savings and checking accounts. For example, money market accounts can earn higher interest than typical checking accounts (making them more like savings accounts) but allow you to write checks, as with a checking account.
Recommended: How to Sign Over a Check to Someone Else
What You Can Do With a Savings Account
While you can’t write checks with a savings account, the different types of savings accounts offer these functions and benefits:
• Security. You can safely save for the future, whether that means building an emergency fund or saving for a down payment on a house. If you bank at a Federal Deposit Insurance Corporation (FDIC)- or National Credit Union Administration (NCUA)-insured institution, you will have up to $250,000 per depositor or shareholder, per insured institution for each account category.
• Interest. As noted above, you’ll earn interest. The annual percentage yield (APY) will help your money grow.
• Convenience. You can also use mobile banking with a savings account. This feature allows you to access your account from your phone to deposit checks, transfer money, and view monthly statements.
• Perks. You may be able to snag some perks by opening a savings account, such as some banking fees being waived or a one-time cash bonus.
• Automated savings. You can set up automatic transfers from your checking account to savings to help increase your savings in an effortless way.
• Account linking. You can link your savings account as a backup to your checking to help avoid overdrafting.
Quick Money Tip: If you’re saving for a short-term goal — whether it’s a vacation, a wedding, or the down payment on a house — consider opening a high-yield savings account. The higher APY that you’ll earn will help your money grow faster, but the funds stay liquid, so they are easy to access when you reach your goal.
Tips for Using a Savings Account to Make Payments
If your goal is to make payments from a savings account, you can’t use a check, as you’ve learned above. Plus, saving accounts may often have monthly transaction limits, meaning you can’t move money from the account for every monthly expense and random bill that may pop up. Generally, you can transfer money from a savings account six times a month.
You can, however, set up a small number of automatic transfers out of your savings account. Follow these tips:
• Have your account details handy. Double-check your account and routing numbers to make sure you are transferring funds out of the right account.
• Limit the bills you pay with your savings account. The less information is out there, the less likely it is to fall into a thief’s hands.
• Don’t attempt more than your account’s transaction limit. Usually, plan on paying no more than six monthly bills with your savings account. Check with your financial institution, however, to find out your exact transaction limits.
• Maintain an adequate balance. Transferring money from your checking account and depositing cash or paychecks into your savings account will help ensure you don’t overdraft the account.
Banking With SoFi
Savings accounts are excellent tools for earning interest and working towards your financial goals. However, they are less suitable for making payments because you can’t write checks from a savings account. Although you can make payments from savings accounts in a pinch, it’s better to use checking accounts for these transactions. After all, it’s what checking accounts are designed for.
If you’re looking for a banking partner who can provide the best of both checking and savings accounts, see what SoFi offers. When you open an online bank account, you’ll have the convenience of spending and saving in one place. Plus, with our Checking and Savings, you’ll earn a competitive APY and pay no account fees, two features that can help your money grow faster. Plus, you’ll receive both paper checks and a debit card to help you make payments.
Better banking is here with up to 4.60% APY on SoFi Checking and Savings.
FAQ
Why do checks come from checking accounts?
Checks come from checking accounts because banks intend payments to flow frequently from these accounts. In addition, checking accounts are the most convenient way to deposit and withdraw money from a bank because you can withdraw money an unlimited amount of times per month.
Why can I not write checks with a savings account?
You can’t write checks with a savings account because the account is for saving money and earning interest payments. Banks don’t provide checks for a savings account because the intention is for you to save money and leave at least a chunk of it untouched in the account. On the other hand, checking accounts allow you to write checks.
Can I write any check from a savings account?
You can’t write a check from a savings account because that is not how they operate according to federal guidelines. You can save money and earn interest with a savings account, while a checking account allows you to write checks.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Inside: Secure your financial future with insights into the top appreciating assets. Find the best appreciating assets and learn how to grow wealth with strategic investments.
Asset appreciation isn’t just an economic term; it’s the fuel that powers wealth creation. Think of appreciating assets as the golden geese, steadily laying valuable eggs that grow in size over time.
This is a crucial concept that triumphs and what you own can become the cornerstone of your financial success.
Asset appreciation isn’t just a buzzword; it’s the driving force behind significant wealth accumulation.
Whether you’re just starting or looking to expand your portfolio, understanding the role appreciation plays can mean the difference between mediocrity and staggering success.
Now, let’s dig in and help move your net worth higher.
What Are Appreciating Assets?
Appreciating assets are the golden geese of the investment world. They are the powerful engines that drive your net worth higher over time.
When you invest in assets like real estate, stocks, and even fine art, you’re placing a bet on their future value.
Unlike the car that loses value the moment you drive it off the lot, these assets typically gain worth, supernova-style, expanding your financial universe with every passing year.
How do assets appreciate in value?
Appreciation, at its core, is an asset’s journey from ‘worth X’ to ‘worth X and beyond’. But how does this magical wealth-building happen?
Several factors can give assets a financial boost.
For starters, the traditional law of supply and demand plays a huge role—if more people want it and there’s not enough to go around, the value goes up.
Toss in the influence of interest rates, economic growth, and geopolitical stability, and you have a mix that can push asset value into new echelons.
Even inflation can be a friend to assets, increasing their nominal value over time.
Remember, appreciation isn’t a given; it’s a hopeful trajectory bolstered by market forces and wise decision-making. You want to hop onto the appreciation train with assets that offer the promise of increasing in value, not just for now, but well into the future.
How to increase net worth with appreciating assets
Increasing your net worth with appreciating assets is like laying bricks for a financial fortress—it requires strategy, patience, and a mix of assets that have a history or strong potential for growth.
Start by assessing your current holdings and considering where you can diversify with assets that shine in appreciation prospects. It’s a game of balance, where you mix higher-risk, high-reward options with stable, gradual growers.
Make a habit of routinely re-evaluating your assets, keeping in mind economic trends and your personal goals. Sometimes, this may mean letting go of underperformers in favor of assets with brighter horizons.
Consider leveraging tax-advantaged accounts and investment strategies to maximize your wealth growth.
Most importantly, ensure liquidity so you can capitalize on new opportunities. Having liquid assets means you won’t miss out when the next big appreciating asset comes knocking.
Top 5 Appreciating Assets You Must Own
#1 – Stocks with High Growth Potential
Stocks are the daredevils of the investment world, particularly those brimming with high growth potential. They’re the kind that can catapult your net worth to the stratosphere if chosen wisely.
Tech giants like Nvidia, Microsoft, Google, Amazon, and Meta are testament to this—their growth over the decades has turned modest investments into fortunes.
Investing in high-growth potential stocks is like spotting a gem in the rough – if you spot the right ones, your financial prospects could shine brightly. You must learn how to invest in stocks for beginners.
Personally, I cannot stress how important it is to learn how to invest in the stock market as I can attest this is how you quickly grow your net worth.
Best For: Investors with a higher risk tolerance who are aiming for greater returns or dividend stocks and have the patience to weather market fluctuations.
#2 – ETFs to Streamline Investments for Optimal Performance
Exchange-Traded Funds (ETFs) are the investment world’s multitaskers, pooling the potential of various assets for optimum performance. By offering a diversified portfolio within a single share, they allow investors to spread their risk while reaping the growth benefits of different markets and sectors.
ETFs provide an easy and efficient way to diversify investments, reducing risk while still offering growth opportunities. They’re especially game-changing for those who prefer a “set and forget” strategy, as many ETFs are designed to passively track indexes or sectors. Many track the S&P, so you can easily invest in the overall market.
They’re cost-effective, often having lower fees than traditional mutual funds, and are accessible to investors with varying levels of experience.
Best For: Both beginners and experienced investors looking for a blend of simplicity, cost efficiency, and diversification in their investment strategy.
#3 – Real Estate: A Staple in Appreciating Assets
Real estate has long stood as a bulwark in the investment community, a reliable appreciator that doubles as both a tangible asset and a potential home. It’s a market marked by stability and a historical uptrend in value, making it a classic choice for those seeking long-term wealth growth.
Owning property is synonymous with the very concept of asset growth, with the power to withstand economic ebbs and flows. Location continues to be the drumbeat to its rise in value – a prime spot can transform a simple parcel into a gold mine.
Plus it is a tangible asset that provides utility and can serve as a hedge against inflation.
Whether it’s through REITs, crowdfunding platforms like Fundrise, or direct ownership, real estate can anchor your investment strategy on solid ground.
Best For: Investors seeking a tangible asset with a dual aim of long-term capital appreciation and passive rental property income. Ideal for those ready to manage properties or hire management, and for those who can handle the responsibilities of ownership.
#4 – Your Own Business: Betting on Your Entrepreneurial Spirit
Your own business isn’t just a job, it’s a reflection of your passion and an opportunity to control your financial destiny. When successfully executed, a business can become one of the most valuable appreciating assets, offering unparalleled autonomy and potentially substantial economic rewards.
Starting a business can lead to exponential wealth growth as the company expands and becomes profitable.
Your business’s value can significantly increase over time, making it a formidable asset in your net worth.
Owning a business is not just about the profits; it’s a journey of personal growth, resilience, and the triumph of turning passion into paychecks. It’s a path that can lead to great wealth, especially when one approaches it with clear strategy and unquenchable enthusiasm.
Best For: Individuals with entrepreneurial spirit, a viable business idea, and the readiness to invest time and capital into a long-term venture. Suitable for those who are tenacious and willing to face the challenges of entrepreneurship head-on.
#5- Self-Investment: The Ultimate Asset with Infinite Returns
Investing in yourself is like planting a seed that grows into a sturdy, towering tree, sheltering your financial future.
This investment can unlock doors to better opportunities, higher incomes, and greater job satisfaction. Whether it’s through education, health, or personal development, the returns on self-investment can be limitless.
Personal development often correlates with higher levels of personal and financial success.
Remember, when you invest in yourself, you become capable of crafting a life that not only brings in wealth but also contentment and a deeper sense of success.
Best For: Any individual seeking to enhance their career trajectory, entrepreneurship potential, or personal satisfaction. This approach is ideal for those who are committed to lifelong learning and self-improvement.
Other Examples of Appreciating Assets You Can Own
The Role of Bonds in a Diverse Securities
Bonds, those steadfast soldiers of the investment world, offer a buffer of safety amid the high-flying volatility of other assets. In a diversified portfolio, bonds contribute stability and predictable income, making them an essential element for many investor’s strategies.
They provide a fixed income stream with less volatility than stocks, acting as a cushion in economic downturns.
Bonds can offer a balance in investment holdings, mitigating risk and providing steady returns. Just make sure the returns are higher than an interest-bearing money market account.
Best For: Investors seeking to balance their portfolio with a lower-risk asset or those nearing retirement who prioritize income and stability over high growth.
Cryptocurrencies: The Digital Gold of Tomorrow?
Cryptocurrencies have emerged as the mavericks of appreciating assets, offering a wild ride with the allure of high-stakes jackpot payouts. As the “digital gold” of the modern era, they encapsulate the spirit of decentralization and technological innovation.
While their volatility can stir up investor heartbeats, their dramatic price appreciation stories make them impossible to ignore for those seeking the thrill of potentially explosive gains.
Even as the cryptocurrency markets continue to ebb and flow, they offer a unique proposition in wealth growth strategies—a high-risk, high-reward horizon that has many gazing toward the future with wallets in hand.
Best For: Tech-savvy investors with a high risk tolerance, seeking to diversify with a modern asset class that has considerable growth potential.
Fine Art and Collectibles: Value Beyond Beauty
Fine art and collectibles are not just a feast for the eyes; they’re also a banquet for your investment portfolio.
These assets bring value that transcends their aesthetic appeal, becoming cherished as cultural treasures and financial boons alike. With the intrinsic charm of rarity and historical significance, art pieces and collectibles can appreciate substantially over time, especially when curated with an expert eye.
For instance, this rare portrait of George Washington is expected to fetch $2.5 million at an upcoming auction.1
Best For: Connoisseurs with a passion for the arts or history, and investors looking for long-term, value-holding assets that also serve as cultural and personal investments. Ideal for those with substantial capital ready to navigate the less liquid markets.
Precious Metals: Why Gold and Silver Remain Attractive
Gold and silver aren’t just the treasures of lore—they’re enduring staples for those looking to fortify their wealth. Their allure lies in their history, intrinsic value, and the stability they can provide when economic tides turn tumultuous. Gold and silver are known for their resilience during economic downturns and inflationary periods. As such, learn how to invest in precious metals.
They are tangible, finite resources with universal value, often resulting in consistent demand.
Best For: Investors looking to hedge risks or seeking a stable store of wealth.
Prospects of Private Equity in Upcoming Markets
Private Equity (PE) forms the backbone for the next wave of market disruptors and innovators. Investing in private companies, especially in emerging markets, can yield substantial capital appreciation as these businesses grow and mature, sometimes well before they hit the public sphere.
This has significant potential for appreciation as companies scale up their operations and increase their market footprint.
Best For: Sophisticated investors with a high-risk tolerance and a long investment horizon. They typically have a significant amount of capital to invest and are looking for opportunities outside of public markets to achieve potential high returns.
Venture Capital’s Role in Shaping Future Wealth
Venture Capital (VC) is the financial catalyst that turns innovative startups into tomorrow’s industry leaders. By injecting capital into early-stage companies, VC not only generates the potential for staggering returns but also plays a critical role in shaping future markets and consumer trends.
It plays a critical role in shaping the business landscape of tomorrow by investing in innovation today. With its penchant for high-risk ventures, VC remains an appealing asset class for those with a futuristic vision who are keen to be part of the next big thing.
Venture capital isn’t merely about capital gains; it’s an embrace of progress, a stake in the evolution of industries, and a partnership with the brightest minds of a generation.
Best For: Investors who have a deep understanding of emerging markets and technologies, a high-risk tolerance, and the patience for long-term investment. Also ideal for those who wish to actively participate in the entrepreneurial process and impact the future direction of new businesses.
The Thriving Market for Vintage Automotive Collectibles
Vintage automotive collectibles are revving up the collectibles market with a roar.
Car enthusiasts and investors alike recognize that certain classic models don’t just retain their charm; they accelerate in value over time. The emotional connection, the engineering legacy, and the nostalgia factor turn these vehicles into appreciating assets with a personal touch.
Plus they offer a tangible investment that can be appreciated both visually and through the driving experience.
Best For: Auto enthusiasts who appreciate the craftsmanship of vintage models and are prepared for the hands-on involvement required. Most may see them as a collectible rather than an investment.
Sports Memorabilia as Lucrative Investments
Sports memorabilia takes you on a trip down memory lane, connecting you to pivotal moments and legends of the past. This nostalgia mixed with exclusivity propels their value, making them sought-after assets in the realm of investing.
The emotional and sentimental value tied to sports icons and historical moments can drive considerable investment interest and demand.
Best For: Sports fans who want to combine their passion with investment potential and like to show off their memorabilia.
Land: The Original Real Estate Investment
Land is the progenitor of all real estate investments, offering a blank canvas for potential development or holding value as a scarce resource. With an appeal that has stood the test of time, land remains one of the most fundamental appreciating assets in the investment portfolio.
It is a finite resource; they’re not making any more of it, so demand can only go up as supply remains constant.
Increases in development, population growth, and changes in land zoning can significantly enhance land value over time.
Best For: Investors seeking to hedge against inflation and looking at long-term growth prospects. Land is best for those who have the capital to invest without the need for immediate returns and can wait for the right opportunity to maximize their profits.
Commodities: A Staple in Diverse Investment Portfolios
Commodities offer a slice of the global economic pie, essential for their role in everyday life—from the grain in your breakfast cereal to the petroleum powering your car. As tangible assets, commodities can provide a buffer against inflation and diversify investment portfolios. A similar case could be made for trading currencies.
Commodities, including metals, energy, and agricultural products, often increase in value with inflation and global demand. They provide an investment route less correlated with the stock market, adding portfolio diversification.
Best For: Diversification seekers and those comfortable dealing with market fluctuations who understand global economic trends. Ideal for investors who wish to hedge against inflation and have an interest in tangible or sector-specific assets.
Navigating the High-Yield Savings Landscape
High-yield savings accounts have emerged as essential vehicles for preserving and modestly growing wealth.
In 2022-2024, with interest rates eclipsing their traditional counterparts, these accounts are more relevant than ever for savvy savers seeking to keep pace with inflation. They provide a safe haven for emergency funds or short-term financial goals while offering better returns than a typical savings account.
They provide a low-risk option to grow savings with the added convenience of liquidity. Just like certificates of deposit or CDs.
Best For: Individuals aiming for a secure, accessible place to save money with a better yield than traditional banking products. Especially well-suited for those starting to build their emergency funds or setting aside cash for near-term expenses.
Peer-to-Peer Lending – A Trend to Watch for Asset Growth
Peer-to-peer (P2P) lending shakes up traditional banking by directly connecting borrowers with investors through online platforms. This asset class is gaining traction, providing a novel way to potentially generate higher returns compared to traditional fixed-income investments.
P2P lending platforms offer higher returns on investment over standard savings, as you’re effectively acting as the bank.
It’s a cutting-edge way to diversify your investment portfolio beyond traditional stocks and bonds.
Best For: Investors looking for alternative income streams and who are comfortable with the risk associated with lending money.
Intellectual Property and Patents: An Overlooked Avenue for Wealth Creation
Owning the rights to an invention or unique creation can lead to a wealth of opportunities, with patents often being a gold mine for inventors and savvy investors alike.
Patents, in particular, hold the promise of a decade-long fruitful life, offering the potential for significant monetary returns through licensing or sales.
Best For: Inventors, entrepreneurs, and investors who are versed in industries where innovations are rapidly commercialized. It’s well-suited for those able to navigate the intricacies of patent law and capable of investing in the enforcement and marketing of their IP.
Alternative Investments: Unique Opportunities for Accredited Investors
Accredited investors have the advantage of accessing a broader range of alternative investments that may not be available to the general public, offering potentially higher returns and portfolio diversification. These can include private equity, hedge funds, and exclusive real estate deals.
It’s crucial, however, for accredited investors to conduct thorough due diligence and assess their risk tolerance when allocating a portion of their portfolio to these alternative assets.
Best For: Seasoned investors looking for diversification and higher risk-reward ratios and qualify as an accredited investor.
Luxury Goods: When Opulence Equals Investment
Luxury goods are not only symbols of status and opulence but can also solidify your investment game. High-end watches, designer handbags, and exclusive jewelry collections often see their value climb, defying the usual wear-and-tear depreciation.
They resonate with collectors and enthusiasts, transforming personal indulgence into a viable investment strategy.
Best For: Investors with a penchant for the finer things in life and enthusiasts looking to blend personal enjoyment with financial gain.
Secrets of the Antique Trade: Seeking Out Hidden
The antique trade is akin to a treasure hunt, where seasoned savvy meets the thrill of discovery. Unearthing hidden gems within flea markets, estate sales, and auction houses not only provides a historical connection but can also reveal investment diamonds in the rough.
Antiques carry the potential for significant bottom line appreciation due to factors like rarity, provenance, and desirability among collectors.
Like finding this antiquated nautical map at an estate sale and now listed for $7.5 million. 2
Best For: Collectors with a passion for history and an eye for value.
What If You Have A Depreciative Asset?
If you’re holding onto a depreciative asset, it’s like grasping a melting ice cube: time can whittle away its value.
Consider selling to repurpose the capital into something that appreciates, upgrading to a more efficient model, or simply using it fully before its value dips too low. Each depreciative asset requires a tailored strategy, balancing between cutting losses and extracting maximum utility.
It’s a strategic financial dance — knowing when to hold on and when to let go of depreciative assets can ensure they serve your bottom line more than they hurt it.
FAQs
Appreciating assets are financial powerhouses that grow your wealth over time. They combat inflation and can provide additional income streams.
By increasing in value, they enhance your net worth, creating a more robust financial foundation for your future endeavors.
Appreciating assets are typically categorized based on their nature and the way they generate value. Common categories include tangible assets like real estate and collectibles, financial assets like stocks and bonds, and intangible assets like patents and copyrights.
The assets that don’t often depreciate include real estate, precious metals like gold and silver, and certain collectibles such as fine art or vintage cars. These assets maintain value or appreciate over time, resistant to the typical wear and tear or technological obsolescence that affects other assets.
Which Asset that Has Appreciation in Value Interests You
In conclusion, adding appreciating assets to your portfolio is a strategic move towards achieving financial security and building long-term wealth.
These assets combat inflation by potentially increasing in value over time, providing an opportunity to earn returns that exceed the average inflation rate.
However, these assets are not considered to be part of your liquid net worth. With all appreciating assets, you must consider the potential taxes on your various investments.
To facilitate this wealth-building strategy, it’s vital to practice saving diligently—consider automating your savings, cutting unnecessary expenses, and increasing income streams. By consistently setting aside funds, you can gradually invest in diverse appreciating assets such as stocks, real estate, or retirement accounts.
This is how you start forming a life consistent with financial freedom.
Source
Barrons. “Rare Portrait of George Washington Could Fetch $2.5 Million at Auction.” https://www.barrons.com/articles/rare-portrait-of-george-washington-could-fetch-2-5-million-at-auction-e2f19134. Accessed February 20, 2024.
Los Angeles Times. “A $7.5-million find: Overlooked Getty estate sale map turns out to be 14th century treasure.” https://www.latimes.com/california/story/2023-10-25/map-dealer-discovers-14th-century-portolan-chart-getty-estate-sale. Accessed February 20, 2024.
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If you’re in search of a low-risk way to grow your money, a liquid certificate of deposit (CD) might be worth a closer look. A liquid CD gives you a fixed, guaranteed rate of interest for a specific term, but unlike standard CDs, you don’t pay a penalty if you withdraw the funds before the maturity date.
Granted, the returns you earn on a liquid CD may not compete with stock market investments, but knowing that your money is earning interest and likely won’t incur any losses can be powerful benefits. Here, you’ll learn more about liquid CDs, including:
• What a liquid CD is
• How to withdraw money from a liquid CD
• The pros and cons of liquid CDs
• Alternatives to liquid CDs.
What Is a Liquid Certificate of Deposit?
Before you think about investing in a CD, here’s a look at definitions:
• A certificate of deposit, or CD, is a savings vehicle that usually gives you a bit of interest with virtually no risk, provided you keep the money in place for a certain term. If, however, you withdraw funds before the CD matures (or reaches the end of its term), you are usually penalized. You will likely lose some or all of the interest earned and perhaps even a bit of the principal. In other words, are certificates of deposit liquid? Usually not.
• A liquid certificate of deposit, on the other hand, gives you flexibility. It allows the account holder to withdraw money from their account prior to the maturity date without incurring penalties. This means you can access funds in the CD should you need them without penalty. However, the rates for liquid CDs tend to be lower than other kinds of CDs.
💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.
Understanding a Liquid CD
You may be wondering, “What are liquid assets?” In the realm of finance, the concept of “liquid” means that an asset can quickly be converted to cash. A liquid CD is a time-bound deposit account where you can earn interest for a specific period of time. Compared to traditional CD’s however, liquid CDs will not charge you early withdrawal penalties. This means you can easily liquidate (turn into cash) your CD without taking a hit in terms of its value.
As noted above, there’s a “but” to this proposition, which you may hear referred to as no-penalty CDs: Liquid CDs typically pay less than traditional CDs. Depending on which financial institution you go to, these products can offer various terms, either as little as a few months or up to several years or longer. Your fixed interest rate will vary according to the length of the term you’ve chosen. Typically, the longer you hold your money in the liquid CD, the higher the rate of return.
What can be a big plus about CD rates is that they are locked in during the full term. This means even if interest rates decrease, your rate would not change. Some financial institutions may require a minimum deposit for these CDs, and they can be significantly higher than traditional CDs; some are at the $10,000 and up level. What’s more, the minimum deposit may go up if you are seeking a higher interest rate, while others don’t have a minimum deposit requirement at all.
How Do You Withdraw Money From a Liquid CD?
If you have decided that you need to withdraw from your liquid CD, here’s what usually happens:
• Check with your bank about how long it will take to process a withdrawal and whether you need to withdraw a certain percentage at a time. (Some banks may require you to close the account entirely.)
• When ready, notify your bank of your withdrawal.
• You will likely have to wait about a week after opening the liquid CD before you can start withdrawing.
• Wait for your funds. Withdrawal is likely not as quick as withdrawing funds from a checking or savings account; your financial institution might require anywhere from a week to a month to process the transaction.
Recommended: What Happens If a Direct Deposit Goes to a Closed Account?
Liquid CD: Real World Example
Once you have decided a no-penalty CD is right for you, you will need to go to a bank or credit union that offers this account. Once you’ve opened an account, you have to fund it.
How it grows will depend on the principal, your APY (annual percentage yield), and how often the CD compounds the interest, which could be, say, daily or monthly.
• If you invested $10,000 in a liquid CD with a three-year at a rate of 5.30%, at the end of the three-year period with interest compounded monthly, you will have a total balance of about $11,719.28.
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Pros of a Liquid CD
When evaluating liquid CDs, it’s worthwhile to review the benefits of these accounts. Some of the key upsides are:
• Liquidity. You can access and withdraw your funds prior to the term’s end. Perhaps you’re having an emergency that requires cash, or you decide to move around your money to better meet your financial goals. It’s possible!
• No penalties. If you dip into the account before it matures, you won’t be assessed a fee.
• Security. Liquid CDs are safe investments. These accounts are federally insured up to $250,000 per depositor, per account ownership category, per insured institution. You’ll know your money is protected when you open a liquid CD with a bank or credit union. Even in the very rare situation of a bank failure, you’re covered as noted.
• Guaranteed returns. When you start a liquid CD account, you usually know the interest rate upfront. It may not be stratospheric, but it’s a sure thing.
Cons of a Liquid CD
Now that we’ve explored the good things about a liquid CD, we need to give equal time to the potential downsides:
• Lower rate of return. The interest rates are significantly lower compared to certificate of deposit rates.
• Withdrawal rules. Yes, these accounts are more accessible, but after your deposit has been in place for a week, your withdrawal guidelines may be quite specific. For instance, you may have to remove all your funds if you want to make a withdrawal, or the amount might be limited to a certain percentage that doesn’t suit your needs. Check before starting a liquid CD investment.
• Tax implications. Earnings on your liquid CD will be taxed at your federal rate, which is something to keep in mind as that will take your return down a notch.
Recommended: How to Automate Your Personal Finances
Alternatives to a Liquid CD
If the idea of a liquid CD doesn’t sound like an appealing low-risk investment option, there are alternatives to also consider.
Traditional CDs
Traditional certificates of deposit require you to stow your money away for a certain period of time. In exchange, you receive a return at the end of that period. The catch is, you are not able to withdraw your funds during this holding period. If you have a financial emergency, for example, and need the money from your CD, you will receive penalties for withdrawing your cash before the period of maturity.
However, this might be a gamble you are willing to take, especially if you have a nice, healthy emergency fund set aside. You’ll earn a better rate of return than with a liquid CD.
Laddering
CD laddering usually involves opening CDs of different term lengths. This strategy allows you to invest long-term CDs which provide higher rates of return, while having the ability to access your funds through a shorter-term CD maturing.
Money Market Account
Another CD alternative is a money market account, which is similar to a savings account with some added benefits. Money market accounts typically require minimum balances and offer rates comparable to savings accounts, which can change over time. While the rates may be lower than a CD, money market accounts typically allow you to withdraw and transfer your money six times per month or more.
Emergency Fund
An emergency fund, or a rainy-day fund, is a savings account that should only be used in times of financial emergencies or unexpected expenses. Depending on your financial position, you can have an emergency fund in a regular savings account, money market account, CD, or liquid CD. It depends on how much you plan to access your emergency fund and how much interest you want to earn in the account.
High-Yield Savings Account
A high-yield savings account can offer a competitive rate of interest, depending on the financial institution offering it (online banks tend to pay more than traditional ones). And you’ll have more liquidity than a CD because you can deposit and withdraw from the account more frequently, though the specifics may vary with each bank. If you want easy access to your funds plus interest, a high-yield bank account may be a good option.
The Takeaway
Liquid CDs are a financial product that offers the safety and guaranteed return of a traditional CD with the bonus of not being penalized if you make an early withdrawal. For those who are comfortable locking their money into a CD but worry an emergency or other need might pop up, this accessibility can be very attractive. Worth noting: Expect lower interest rates from a liquid CD than a standard one. Alternatives to a liquid CD can include a high-yield savings account.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with up to 4.60% APY on SoFi Checking and Savings.
FAQ
Are CDs liquid investments?
Traditional CDs are not liquid investments. Funds held in a CD cannot be accessed until the account term is reached. If you need to withdraw money from your CD prior to its maturity date, you will have to pay a penalty. A liquid CD, however, offers flexibility to withdraw money from your account prior to its term date without the usual fees.
What is a non-penalty CD?
A non-penalty CD, also known as a liquid CD, is a time deposit that offers interest on your money. However, the rate is usually somewhat lower than the rate for a typical CD (the kind with penalties). The longer the term you choose for your liquid CD, the more you usually can earn.
How much is the penalty for early withdrawal from a CD?
Each financial institution has its own way of calculating this, but it usually involves losing some of all of the interest you have accrued. If you have a two-year traditional CD and withdraw funds early, the fee could vary considerably; a recent search found anywhere from two months’ to a year’s’ worth of interest. If you have a liquid or no-penalty CD, you will of course avoid these fees.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
An interest checking account is, as the name suggests, a checking account that earns interest. Typically, checking accounts haven’t offered this feature, while savings accounts did. However, there are a number of interest-bearing checking accounts now available that can help your cash on deposit grow.
Typically more flexible than savings accounts, interest checking can give you a financial boost if they’re a good fit for you. In some cases, however, they may have minimum requirements and other aspects that may not sync up with your money style.
Here’s a closer look at these interest-bearing checking accounts, so you can decide if one might be right for you. Learn more about:
• What is an interest-bearing checking account?
• How do interest-bearing checking accounts work?
• How much interest could you earn?
• What are the pros and cons of interest checking accounts?
What Is an Interest Checking Account?
Whether it’s called an interest-bearing checking account, interest checking account, or high-yield checking, this is a type of checking account where the account holder can earn interest. The interest rate may not be amazingly high: At the end of 2023, the rate averaged 0.70% APY, or annual percentage yield, which is the real rate one earns when compounding interest kicks in. (Occasionally, APYs of 3.00% or higher may pop up.) Even at the lower range, the interest accrued is better than nothing. Honestly, who doesn’t want to earn more interest?
There may, however, be a catch:
• Although the account will pay an APY, account holders may be required to pay monthly maintenance fees or maintain a certain account balance (say, $500 or more).
• In addition, you may be required to receive a certain number of or dollar amount of direct deposits per month or meet other criteria, such as relating to debit card usage.
• You might also have to pay a monthly account fee; again, it depends on the bank you choose. Recent research found that checking accounts had an average monthly fee of $10.77; where an interest account will fall can vary with the financial institution.
• One more point: In many cases, interest checking accounts earn less interest compared to savings accounts.Yes, a checking account has added flexibility that may be beneficial (say, unlimited transactions and debit-card and check-writing features), but it’s worth noting. You might consider a combined checking and savings account to get the best of both worlds.
💡 Quick Tip: Want to save more, spend smarter? Let your bank manage the basics. It’s surprisingly easy, and secure, when you open an online bank account.
How Do Interest-Bearing Checking Accounts Work?
These types of accounts work in a similar way to other kinds of checking accounts. Account holders can make deposits at ATMs, online, by direct deposit, or at branch locations depending on the financial institution.
As for withdrawals, account holders can make bank transfers, withdraw cash from an ATM, write a check, use bill pay, or pay for purchases with a debit card. The only difference is that, instead of earning no money on your balance, you will accrue some interest, usually on a monthly basis.
How Are Interest Checking Accounts Different Than Other Checking Accounts?
The truth is, checking account interest rates will vary depending on the type of account and the financial institution. On average, banks offer an APY of 0.07%. There are high-yield checking accounts that could pay more, but these rates are generally still lower than what you could earn with a savings account. That said, with a little online research, you might find an interest checking APY of 3.00% or higher at this time. Those couple of extra points of interest may well be worthwhile as part of your plan to grow your wealth.
Just be sure to note the account requirements, as mentioned above. If you have to keep more money in the account that is comfortable for your budget and cash flow, you could wind up incurring late fees elsewhere in your financial life.
Here’s an example:
• Perhaps you decide to pay your credit card bill late because you didn’t want your checking account balance to dip below the minimum to earn interest.
• You opt to wait for your next paycheck to hit before you send your payment to your card issuer.
• The credit card fee for the late payment is likely more than the interest you’re earning on the money in your checking account.
So in this situation, keeping your money in an interest checking account might not be a win-win for you.
Common Account Requirements for Interest Checking Accounts
When it comes to opening an interest-bearing checking account, there may be some requirements to wrangle. Keep the following factors in mind:
• Minimum-balance and other account requirements: When you open an account, some financial institutions may require a minimum initial deposit. Current offers for interest-bearing checking range from zero dollars to $500 and occasionally significantly higher amounts as a minimum deposit. Shop around to find the right account for your needs.
Plus, as mentioned above, you may need to maintain a certain balance in order to avoid fees. There may also be other rules such as the amount of transactions you can make on your debit card.
• Fees: Some interest checking accounts may charge monthly fees, as described earlier in this article, which could eat into the interest you earn. You may have to keep a higher balance in your account to avoid fees. Other fees to consider are overdraft fees, and whether you’ll need to pay third-party network fees to access certain ATMs.
• Application requirements: Depending on the financial institution, you may be required to submit documents such as your Social Security number, proof of address, and government-issued photo ID. If you want to open a checking account with a credit union, you’ll most likely need to become a member.
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Advantages and Disadvantages of Interest Checking Accounts
An interest checking account may not be the best option for you. Consider the following advantages and disadvantages before opening an account.
Advantages of Interest Checking Accounts
• You’ll earn interest Most traditional checking accounts won’t pay you any interest, but with an interest-bearing one, you’ll earn high interest. That means your money will help you earn some money while it’s sitting in the account. Typical APYs can range from 0.50% to 3.00% or higher.
• You’ll have more flexibility Checking accounts tend not to have transaction limits as you may with savings accounts or money market accounts. Plus, you can use checks and a debit card, offering you more flexibility to access your money.
Disadvantages of Interest Checking Accounts
• You may have to meet certain requirements Though there are some interest checking accounts that don’t have minimum balance requirements or monthly fees, some do. That means you could be on the hook for a monthly fee if you can’t meet account requirements. In some cases, these fees could negate the amount you earn in interest.
• You may not get a high interest rate The interest you earn on a checking account tends to be lower compared to ones you earn from a high-yield savings account or money market account. But there are definitely exceptions to the rule: Some banks have offered as much as 3.00% APY or higher on interest checking accounts, so it can truly pay to shop around and see if you can snag one of those deals.
💡 Quick Tip: Are you paying pointless bank fees? Open a checking account with no account fees and avoid monthly charges (and likely earn a higher rate, too).
Where Can I Get an Interest Checking Account?
You can open an interest checking account at most financial institutions, including traditional and online banks, as well as credit unions. As mentioned before, you may be required to become a member of the credit union you want to open a checking account with.
When shopping around, look beyond interest rates. Other equally important factors to consider are:
• Account features (access to your funds, for instance; when the interest accrues)
• Account-holder benefits (are there other perks to being an account-holder, such as a sign-up bonus?)
• ATM, overdraft, and other fees
• Minimum opening deposit and account balance requirements to earn interest.
Is It Worth It to Get an Interest Checking Account?
Thinking carefully about your financial situation and goals should help you determine whether it’s worth getting an interest bearing checking account.
• For those who want to keep a decent amount of money in a checking account to ensure bills and daily transactions are taken care of, it might be worth considering. Why not earn a bit of interest if you can find an account that doesn’t charge fees?
• However, if you’re interested in having a stash of cash available for short-term or medium-term savings goals — as in, you’re not planning on making frequent withdrawals — then a high-yield savings or a checking and savings account might be the better choice.
• If your goal is to save for long-term goals like retirement or a college fund for your child, then an investment account could be the way to go.
Recommended: How to Avoid ATM Fees
The Takeaway
An interest-bearing checking account may be a good fit if you’re looking for an account for daily transactions that can grow your money a bit. It’s important to check the fine print to see if there are any minimum balance requirements and what the fees are. Comparing the potential interest to be earned with any fees that may be charged is a vital step before applying for an interest checking account.
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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
A Roth IRA is an individual retirement account that allows you to contribute after-tax dollars, and then withdraw the money tax free in retirement. A Roth IRA is different from a traditional IRA, which is a tax-deferred account: meaning, you contribute pre-tax dollars — but you owe tax on the money you withdraw later.
Many people wonder what a Roth IRA is because, although it’s similar to a traditional IRA, the two accounts have many features and restrictions that are distinct from each other. Roth accounts can be more complicated, but for many investors the promise of having tax-free income in retirement is a strong incentive for understanding how Roth IRAs work.
What Is a Roth IRA?
A Roth IRA is a retirement account for people who want to make after-tax contributions. The trade-off for paying taxes upfront is that when you retire, all of your withdrawals will be tax free, including the earnings and other gains in your account.
That said, because you’re making after-tax contributions, you can’t deduct Roth deposits from your income tax the way you can with a traditional IRA.
Understanding Contributions vs Earnings
An interesting wrinkle with a Roth IRA is that you can withdraw your contributions tax and penalty-free at any time. That’s because you’ve already paid tax on that money before initially depositing or investing it.
Withdrawing investment earnings on your money, however, is a different story. Those gains need to stay in the Roth for a minimum of five years before you can withdraw them tax free — or you could owe tax on the earnings as well as a 10% penalty.
It’s important to know how the IRS treats Roth funds so you can strategize about the timing around contributions, Roth conversions, as well as withdrawals. 💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).
Roth IRA Eligibility
Technically, anyone can open any type of IRA, as long as they have earned income (i.e. taxable income). The IRS has specific criteria about what qualifies as earned income. Income from a rental property isn’t considered earned income, nor is child support, so be sure to check.
There are no age restrictions for contributing to a Roth IRA. There are age restrictions when contributing to a traditional IRA, however.
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Roth IRA Annual Contribution Limits
For 2024, the annual limit is $7,000, and $8,000 for those 50 and up. The extra $1,000 is called a catch-up provision, for those closer to retirement.
For 2023, the annual contribution limits for both Roth and traditional IRAs was $6,500, or $7,500 for those 50 or older. So, there was a $500 increase in contribution limits between 2023 and 2024.
Remember that you can only contribute earned income. If you earn less than the contribution limit, you can only deposit up to the amount of money you made that year.
One exception is in the case of a spousal Roth IRA, where the working spouse can contribute to an IRA on behalf of a spouse who doesn’t have earned income.
Other Roth IRA Details
Since Roth IRAs are funded with after-tax income, contributions are not tax-deductible. One exception for low- and moderate-income individuals is something called the Saver’s Credit, which may give someone a partial tax credit for Roth contributions, assuming they meet certain income and other criteria.
Note that the deadline for IRA contributions is Tax Day of the following year. So for tax year 2023, the deadline for IRA contributions is April 15, 2024. But, if you file an extension, you cannot further postpone your IRA contribution until the extension date and have it apply to the prior year.
Roth IRA Income Restrictions
In addition, with a Roth there are important income restrictions to take into account. Higher-income individuals may not be able to contribute the full amount to a Roth IRA; some may not be eligible to contribute at all.
It’s important to know the rules and to make sure you don’t make an ineligible Roth contribution if your income is too high. Those funds would be subject to a 6% IRS penalty.
For 2023:
• You could contribute the full amount to a Roth as long as your modified adjusted gross income (MAGI) was less than $138,000 (for single filers) or less than $218,000 for those married, filing jointly.
• Single people who earned more than $138,000 but less than $153,000 could contribute a reduced amount.
• Married couples who earned between $218,000 and $228,000 could also contribute a reduced amount.
For 2024 the numbers have changed and the Roth IRA income limits have increased:
• For single and joint filers: in order to contribute the full amount to a Roth you must earn less than $146,000 or $230,000, respectively.
• Single filers earning more than $146,000 but less than $161,000 can contribute a reduced amount. (If your MAGI is over $161,000 you can’t contribute to a Roth.)
• Married couples who earn between $230,000 and $240,000 can contribute a reduced amount. (But if your MAGI is over $240,000 you’re not eligible.)
If your filing status is…
If your 2023 MAGI is…
If your 2024 MAGI is…
You may contribute:
Married filing jointly or qualifying widow(er)
Up to $218,000
Up to $230,000
For 2023 $6,500 or $7,500 for those 50 and up. For 2024 $7,000 or $8,000 for those 50 and up.
$218,000 to $228,000
$230,000 to $240,000
A reduced amount*
Over $228,000
Over $240,000
Cannot contribute
Single, head of household, or married filing separately (and you didn’t live with your spouse in the past year)
Up to $138,000
Up to $146,000
For 2023 $6,500 or $7,500 for those 50 and up. For 2024 $7,000 or $8,000 for those 50 and up.
From $138,000 to $153,000
From $146,000 to $161,000
Reduced amount
Over $153,000
Over $161,000
Cannot contribute
Married filing separately**
Less than $10,000
Less than $10,000
Reduced amount
Over $10,000
Over $10,000
Cannot contribute
*Consult IRS rules regarding reduced amounts. **You did live with your spouse at some point during the year.
Advantages of a Roth IRA
Depending on an individual’s income and circumstances, a Roth IRA has a number of advantages.
• No age restriction on contributions. With a traditional IRA, individuals must stop making contributions at age 72. A Roth IRA works differently: Account holders can make contributions at any age as long as they have earned income for the year.
*You can fund a Roth and a 401(k). Funding a 401(k) and a traditional IRA can be tricky, because they’re both tax-deferred accounts. But a Roth is after-tax, so you can contribute to a Roth and a 401(k) at the same time (and stick to the contribution limits for each account).
• Early withdrawal option. With a Roth IRA, an individual can generally withdraw money they’ve contributed at any time, without penalty (but not earnings on those deposits). In contrast, withdrawals from a traditional IRA before age 59 ½ may be subject to a 10% penalty.
• Qualified Roth withdrawals are tax-free. Investors who have had the Roth for at least five years, and are at least 59 ½, are eligible to take tax- and penalty-free withdrawals of contributions + earnings.
• No required minimum distributions (RMDs). Unlike IRAs, which require account holders to start withdrawing money after age 73, Roth IRAs do not have RMDs. That means an individual can withdraw the money as needed, without fear of triggering a penalty.
Disadvantages of a Roth IRA
Despite the appeal of being able to take tax-free withdrawals in retirement, or when you qualify, Roth IRAs have some disadvantages.
• No tax deduction for contributions. The primary disadvantage of a Roth IRA is that your contributions are not tax deductible, as they are with a traditional IRA and other tax-deferred accounts (e.g. a SEP IRA, 401(k), 403(b)).
• Higher earners often can’t contribute to a Roth. Affluent investors are generally excluded from Roth IRA accounts, unless they do what’s known as a backdoor Roth or a Roth conversion. (There are no income limits for converting a traditional IRA to a Roth, but you’ll have to pay taxes on the money that goes into the Roth — though you won’t face a penalty.)
• The 5-year rule applies. The 5-year rule can make withdrawals more complicated for investors who open a Roth later in life. If you open a Roth or do a Roth conversion at age 60, for example, you must wait five years to take qualified withdrawals of contributions and earnings, or face a penalty (some exceptions to this rule apply; see below).
Last, the downside with both a traditional or a Roth IRA is that the contribution limit is low. Other retirement accounts, including a SEP-IRA or 401(k), allow you to contribute far more in retirement savings. But, as noted above, you can combine saving in a 401(k) with saving in a Roth IRA as well. 💡 Quick Tip: Did you know that you must choose the investments in your IRA? Once you open a new IRA and start saving, you get to decide which mutual funds, ETFs, or other investments you want — it’s totally up to you.
Recap: Roth IRA Withdrawal Rules
Because Roth IRA withdrawal rules can be complicated, let’s review some of the ins and outs.
Qualified Distributions
Since you have already paid tax on the money you deposit, you’re able to withdraw contributions at any time, without paying taxes or a 10% early withdrawal penalty.
For example, if you’ve contributed $25,000 to a Roth over the last five years, and your investments have seen a 10% gain (or $2,500), you would have $27,500 in the account. But you could only withdraw up to $25,000 of your actual deposits.
Withdrawing any of the $2,500 in earnings would depend on your age and the 5-year rule.
The 5-Year Rule
What is the 5-year rule? You can withdraw Roth account earnings without owing tax or a penalty, as long as it has been at least five years since you first funded the account, and you are at least 59 ½. So if you start funding a Roth when you’re 60, you still have to wait five years to take qualified withdrawals.
The 5-year rule applies to everyone, no matter how old they are when they want to withdraw earnings from a Roth.
There are some exceptions that might enable you to avoid owing tax or a penalty.
Non-Qualified Withdrawals
Non-qualified withdrawals of earnings from a Roth IRA depends on your age and how long you’ve been funding the account.
• If you meet the 5-year rule, but you’re under 59 ½, you’ll owe taxes and a 10% penalty on any earnings you withdraw, except in certain cases.
• If you don’t meet the 5-year criteria, meaning you haven’t had the account for five years, and if you’re less than 59 ½ years old, in most cases you will also owe taxes and a 10% penalty.
There are some exceptions that might help you avoid paying a penalty, but you’d still owe tax on the early withdrawal of earnings.
Exceptions
Again, these restrictions apply to the earnings on your Roth contributions. (You can withdraw direct contributions themselves at any time, for any reason, tax and penalty free.)
You can take an early or non-qualified withdrawal prior to 59 ½ without paying a penalty or taxes, as long you’ve been actively making contributions for at least five years, in certain circumstances, including:
• For a first home. You can take out up to $10,000 to pay for buying, building, or rebuilding your first home.
• Disability. You can withdraw money if you qualify as disabled.
• Death. Your heirs or estate can withdraw money if you die.
Additionally you can avoid the penalty, although you still have to pay income tax on the earnings, if you withdraw earnings for:
• Medical expenses. Specifically, those that exceed 7.5% of your adjusted gross income.
• Medical insurance premiums. During a time in which you’re unemployed.
• Qualified higher education expenses.
Not only are the early withdrawal restrictions looser than with a traditional IRA, the post-retirement withdrawal restrictions are lesser, as well. Whereas account holders are required to start taking distribution of funds from their IRA after age 73, there is no pressure to take distribution from a Roth IRA at any age.
Roth IRA vs Traditional IRA
There are certain things a Roth IRA and a traditional IRA have in common, and several ways that they differ:
• It’s an effective retirement savings plan: Though the plans differ in the tax benefits they offer, both are a smart way to save money for retirement.
• Not an employer-sponsored plan: Individuals can open either type of IRA through a financial institution, and select their own investments or choose an automated portfolio.
• Maximum yearly contribution: For 2023, the annual limit is $6,500, with an additional $1,000 allowed in catch-up contributions for individuals over age 50. For 2024 it’s $7,000, and $8,000 if you’re 50 and older.
There are also a number of differences between a Roth and a traditional IRA:
• Roth IRA has income limits, but a traditional IRA does not.
• Roth IRA contributions are not tax deductible, but contributions you make to a traditional, tax-deferred IRA are tax deductible.
• Roth IRA has no RMDs. Individuals can withdraw money when they want, without the age limit imposed by a traditional IRA.
• Roth IRA allows for penalty-free withdrawals before age 59 ½. While there are some restrictions, an account holder can typically withdraw contributions (if not earnings) before retirement.
Is a Roth IRA Right for You?
How do you know whether you should contribute to a Roth IRA or a traditional IRA? This checklist might help you decide.
• You might want to open a Roth IRA if you don’t have access to an employer-sponsored 401(k) plan, or if you do have a 401(k) plan but you’ve already maxed out your contribution there. You can fund a Roth IRA and an employer-sponsored plan.
• Because contributions are taxed immediately, rather than in retirement, using a Roth IRA can make sense if you are in a lower tax bracket or if you typically get a refund from the IRS. It may also make sense to open a Roth IRA if you expect your tax bracket to be higher in retirement than it is today.
• Individuals who are in the beginning of their careers and earning less might consider contributing to a Roth IRA now, since they might not qualify under the income limits later in life.
• A Roth IRA can be helpful if you think you’ll work past the traditional retirement age.
The Takeaway
A Roth IRA has many of the same benefits of a traditional IRA, with some unique aspects that can be attractive to some people saving for retirement. With a Roth IRA you don’t have to contend with required minimum distributions (RMDs); you can contribute to a Roth IRA at any age; and qualified withdrawals are tax free. With all that, a Roth IRA has a lot going for it.
That said, not everyone is eligible to fund a Roth IRA. You need to have earned income, and your annual household income cannot exceed certain limits. Also, even though you can withdraw your Roth IRA contributions at any time without owing a penalty, the same isn’t true of earnings.
You must have been funding your Roth for at least 5 years, and you must be at least 59 ½, in order to make qualified withdrawals of earnings. Otherwise, you would likely owe taxes on any earnings you withdraw — and possibly a penalty. Still, the primary advantage of a Roth IRA — being able to have an income stream in retirement that’s completely tax free — can outweigh some of the restrictions for certain investors.
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FAQ
Are Roth IRAs insured?
If your Roth IRA is held at an FDIC-insured bank and is invested in bank products like certificates of deposit (CDs) or money market account, those deposits are insured up to $250,000 per depositor, per institution. On the other hand, if your Roth IRA is with a brokerage that’s a member of the Securities Investor Protection Corporation (SIPC), and the brokerage fails, the SIPC provides protection up to $500,000, which includes a $250,000 limit for cash. It’s important to note that neither FDIC or SIPC insurance protects against market losses; they only cover losses due to institutional failures or insolvency.
How much can I put in my Roth IRA monthly?
For tax year 2023, the maximum you can deposit in a Roth or traditional IRA is $6,500, or $7,500 if you’re over 50. How you divide that per month is up to you. You just can’t contribute more than the annual limit.
Who can open a Roth IRA?
Anyone with earned income (i.e. taxable income) can open a Roth IRA, but your income must be within certain limits in order to fund a Roth.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Savings bonds are a cornerstone of conservative investing, offering a secure and reliable means to grow one’s wealth over time. Yet, many people remain unclear about the intricacies of this financial instrument.
In this article, we aim to demystify this valuable financial tool by delving into its core characteristics, advantages, and practical applications. Whether you’re an individual seeking to diversify your investment portfolio or a professional aiming to optimize your financial strategies, understanding the ins and outs of savings bonds can be a game-changer.
What is a savings bond?
Savings bonds are a low-risk, U.S. government-backed investment that you can buy to help raise funds over time. When you purchase one, you are loaning money to the government. In return, the government promises to repay the amount you invested with interest.
Electronic savings bonds are simple to buy, safe to invest in, and affordable. You receive interest payments, and the bonds purchased can go to many purposes later, such as qualified education expenses. The purchase amounts range from a minimum investment of $25 – $10,000. However, there are maximum purchase limits per calendar year depending on the type of bond you purchase.
How do savings bonds work?
Think of a savings bond as a loan to the government. While there are a few rules, the main idea is that the government promises to pay back your loan through interest payments.
The government sets the interest rate for the loan, which doesn’t change for the bond’s duration. You buy these bonds at face value.
Savings bonds offer fixed terms, meaning they mature at a specific date. Once they reach that state, you can redeem them for their total value – plus interest.
The type of bond you purchase determines the maturity date. Some can take up to 30 years, while others take much less time.
Different Types of Savings Bonds
There are two main types of savings bonds in the US today, both a fixed rate, while paper bonds are slowly being phased out.
The U.S. Government issues two main types at face value: Series I Bonds and Series EE Bonds. Below is an overview of what each entails.
Series I Bonds
A Series I U.S. Savings Bond is a type of bond that offers a fixed interest rate that adjusts for inflation. The bonds are sold at face value, meaning that the price you purchase savings bonds for is what it is worth once the bond reaches maturity. With I Bonds, you can protect your investment from the variable inflation rate.
The government sets the I Bond inflation rate twice annually, once for each upcoming six-month period.
The current interest rate is 5.27% for I Bonds issued between November 1, 2023 to April 30, 2024.
I Bonds can earn interest for up to 30 years, unless you decide to cash them out beforehand. You can buy them from the U.S. Treasury using a TreasuryDirect account, or purchase paper bonds using your IRS tax refund.
Series EE Bonds
Series EE Savings Bonds are savings bonds that earn interest regularly for up to 30 years. The government guarantees that the Series EE Bond doubles in value in 20 years, even if it needs to add money at 20 years to reach that number.
Series EE bonds differ from I bonds in multiple ways. Primarily, they are not inflation adjustable. The second is that new EE bonds are only available for electronic purchase.
The government applies the bond’s interest rate to a new principal every six months. A principal is the sum of the previous principal and the fixed rate of interest in the past six months.
As of 2005, new EE Bonds earn a fixed interest rate set on the day you buy a bond. After 20 years pass, the government may adjust the interest on it.
When should I consider a savings bond?
You can buy a savings bond anytime, depending on your finances and long-term investment goals. There are multiple reasons why buying bonds is a good idea for later, however, such as:
Their low-risk nature
They generate a stable and low-risk investment
The interest earned on them is exempt from state and local taxes
Any investor with $25 and above can buy them
Bonds pay back, helping you plan for the future
Enjoying the stability of a fixed rate of interest announced twice annually
Are savings bonds worth it?
Savings bonds are worth the investment if you are looking for a stable way to increase your money at a reliable, fixed rate. If you want faster and higher returns, saving bonds may not be your best option. Remember that you do have to pay federal taxes as the bonds accrue interest, but not state or local taxes.
Ultimately, the selling point for purchasing a savings bond is a stable and safe return on your investment. Not all investments you make come with a guarantee as solid as the one you can get from the government.
The TreasuryDirect website also lets you send an announcement to someone to let them know you purchased a savings bond for them as a gift.
How do I redeem my savings bonds?
Redeeming a savings bond is usually an uncomplicated and seamless process. If you purchased your bonds electronically, such as the Series EE or Series I bonds, you could cash them in through your online TreasuryDirect account. Once you do so, you will receive your money in a checking or savings account of your choice in a few business days.
If you purchased older paper savings bonds, you could redeem them at financial institutions where you have an account. The option to cash in a bond at a bank or credit union depends on how long you had an account with them.
For older series of savings bonds, like HH bonds, you can’t redeem them through banks or credit unions. The FAQ section will cover HH bonds, as the government no longer issues them.
For HH Bonds, you must complete a specific form called the FS Form 1522. Once completed, you must mail the bond with a certified signature and direct deposit information to the Treasury Retail Securities Services.
Early Withdrawal Penalty
Sometimes, a circumstance may force you to withdraw your savings bond early. Although not advisable as savings bonds are long-term investments, you still have options when something unexpected happens.
Series EE and Series I savings bonds have an early withdrawal penalty if you redeem them less than five years after their issue date.
So, if you cash in the bond before the five-year mark, you receive the principal amount plus the interest earned up to that point minus the interest accrued in the past three months.
After the five-year mark, there are no penalties for redeeming your savings bond. You can receive the total value of the principal and interest earned.
Savings Bonds vs. Savings Accounts vs. Certificates of Deposit (CDs)
A savings account and a CD are financial products that banks and credit unions offer. With a savings account, you can deposit money and earn interest on electronic bonds over time. A CD is when you keep a specific amount of money with the bank for a timeframe in exchange for fixed interest rates.
Although savings accounts and CDs are low-risk investment options, they are not backed by the government like savings bonds. And unlike savings bonds, you must pay federal, state, and local income taxes for CDs and savings accounts.
Benefits and Drawbacks of Investing in Savings Bonds
In terms of benefits, an electronic bond comes with low-risk, guaranteed returns backed by the government. You can use them as a future nest egg, for retirement, or to fund a child or grandchild’s education. Moreover, they come with tax benefits. The federal government allows exemptions on state and local taxes and are simple to buy and later redeem. Keep in mind that you do have to pay federal income tax on them in some cases.
One drawback to electronic bonds is the time it takes to make a solid amount of interest like a money market account. Additionally, they do not offer the potential for capital gains, only from the interest accrued over time. Finally, if you do not have a Series I bond, you do not have sufficient protection against inflation.
Bottom Line
Bottom line: Savings bonds are an excellent investment option if you are looking for guaranteed returns by the United States government. Although it takes time to get their full benefit, they are a reliable way to save money, helping you plan for the future or pay tuition for college. You don’t have to worry about a variable interest rate, and the interest payment is always stable.
Frequently Asked Questions
Where can I purchase savings bonds?
You can purchase savings bonds online from the U.S. Department of the Treasury through their online platform, www.treasurydirect.gov. Buying from the treasury guarantees safety and security. Paper bonds can only be purchased for Series I U.S. savings bonds. Additionally, you can only pay for a paper bond using a tax return.
What is an HH savings bond?
HH savings bonds offer semi-annual interest directly to the bondholder. They were only available as a paper bond by exchanging Series EE or Series E bonds. The government discontinued them in 2004, and they are no longer available for sale. However, some HH bonds are still redeemable depending on their year of purchase.
When can I redeem my savings bonds?
Savings bonds can be redeemed after a minimum holding period, which is typically one year. However, if you redeem the bond before it is five years old, you will lose the last three months of interest as a penalty. Bonds reach their full face value at maturity, which is usually 20 to 30 years from the issue date.
Here’s everything you need to know to help a young person kick-start their savings journey early.
November 16, 2023
Children grow up fast—so it’s never too soon for family and friends to take steps to help them reach their greatest potential. One way to do that is by opening and funding a savings account for a minor. It’s not only an opportunity to teach them the value of saving long before they’ll ever need the money—it’s also a great way to build a strong financial foundation. Over time, money from that savings account might help them pay for college, their first car, or even their starter home.
Before you open a savings account for a minor—sometimes known as a custodial account, which you’ll manage until transferring it to the child once they’re old enough to take on the responsibility—you’ll want to understand how it works. Here’s everything you need to know.
What to look for in a savings account for a minor
Opening a savings account for a child can be as basic as opening a traditional savings account that accumulates interest over time. But not all custodial accounts are created equal—and you have an array of savings account options.
As with any financial undertaking, your priorities will determine which type of custodial savings account is right for you. If you don’t want the child to be aware of the account, you might consider opening a high-yield savings account in your own name—and then have the funds unofficially earmarked for the young person.
Another option is to open a joint savings account shared between yourself and the child’s parent—a common choice among those saving on behalf of their grandkids. For any custodial account, you’ll want to ensure that the child’s parents are aware of the account. Why? The child may receive a 1099 form at tax time, potentially requiring the interest accrued on the account to be reported to the IRS.
If you want the child involved in the savings account to improve their financial literacy, you can consider a custodial account that you control until it’s handed over when the child reaches age 18 or 21 (it varies by state).
Alternatively, you can open a certificate of deposit (CD) or a money market account as a custodial account. A CD allows you to lock in an interest rate that can be even higher than that of a savings account. A money market account, meanwhile, offers you a competitive interest rate like a savings account and sometimes even a debit card for easy access to the money.
What you need to open a savings account for a minor
The first step to applying for a custodial account—such as one that grandparents might open for a grandchild—is to select the type of account you’d like to open and then contact your bank. As with any account application, you’ll need to provide personal information like your name, date of birth, address, and contact information—as well as your Taxpayer Identification Number (TIN). (Your TIN is often the same as your Social Security number.) You’ll also need to provide the child’s identifying information for a custodial account.
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How to get the most out of a savings account for a minor
Want to open a savings account for a child that will have a lasting impact? The key is to make deposits on a regular basis. A savings account can grow significantly over time through compound interest—and the best way to maximize that interest is to deposit funds into the account over the years.
Another way to make a financial gift have a true legacy is to involve the child in the account as a way to teach them about money and to help them develop smart financial habits. Take time to show them how their savings are growing by reviewing the account statements together. By including them in the account, making them part of the account process will help them understand the value of saving and the financial benefits of planning ahead.
Start helping a child build their financial foundation
Opening a savings account for a child can help them get a leg up on the future—so be sure you’re doing it right. It’s important to research all your account options, make occasional deposits to maximize interest earned, and communicate early and often about ways they can responsibly manage the money once it leaves your care.
Ready to open a savings account for a minor? Make sure you’re maximizing your savings with a Discover® high-yield online savings account.
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About 95% of Americans have a bank account, and many people have both a checking and a savings account. Sometimes, though, there may be advantages to what is considered a hybrid account, offering the best of both worlds (or at least some of the benefits of each).
For instance, you might have the ease of access that you get with a checking account: Hello, debit card! And you might also earn a higher interest rate, the way you might with some savings accounts vs. checking.
Financial institutions may offer different versions of hybrid accounts. Read on to learn about some of the most common features so you can decide if a hybrid bank account is right for you.
Defining the Hybrid Account
There are a variety of bank accounts available to consumers. And the type of accounts people are drawn to will depend on their financial goals, situation, and how they choose to organize their finances.
A hybrid account can merge the features of both checking and savings accounts. Here’s a bit more about hybrid accounts:
• A hybrid account is one that combines the perks of a checking account with features of an interest-bearing savings account. Instead of linking your checking and savings account, they’re basically functioning as one cohesive account.
• A hybrid account allows access to your money on a day-to-day basis, like a checking account would. That can mean that you may get a debit card to use with it.
• On the flip side, it allows your money to grow the way it might in a savings account.
Of course, every financial institution is different, and each might have a different approach to crafting a hybrid bank account. But the main gist of a hybrid account is that it’s a bank account that bears some resemblance to a day-to-day checking account and a long-term savings account.
💡 Quick Tip: An online bank account with SoFi can help your money earn more — up to 4.60% APY, with no minimum balance required.
Different Types of Accounts
To understand what can make a hybrid account a useful tool, it’s helpful to first understand the features and pros and cons related to traditional checking and savings accounts and then compare.
Checking Accounts
Checking accounts usually allow you to deposit money, write checks, or use a debit card to pay for goods and services. There are typically no withdrawal limits, and you can often link a checking account to other accounts and credit cards. It might be the account you use to pay recurring bills each month, like a car loan or student loan payment.
Banks may pay you interest on the money that sits in your checking account. However, regular checking account interest rates are typically low, with an average rate of 0.06%.
These rates don’t always catch up with the national inflation rate, which is currently about 3.7%. That means your money is actually depreciating in value while it sits in the account. In the long term, this may not make checking accounts a particularly good place to park a lot of cash.
Checking accounts may also charge fees for the services they offer, such as monthly maintenance fees.
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Savings Accounts
Savings accounts are another type of deposit account that you can open with your financial institution of choice. They usually earn some interest, with the current standard savings account earning about 0.46%.
However, high-yield savings accounts are an alternative to traditional accounts; they may sometimes offer interest rates of 4% or more. Higher-interest savings accounts can help you beat inflation so your money doesn’t lose value by growing at a slower rate than inflation. You may find these accounts offered at online banks vs. traditional ones.
Savings accounts are generally appealing because they are a separate place to store money you don’t necessarily want to use on day-to-day expenses. For example, it could be a good place to keep your emergency fund or even to save for a vacation or a move across the country.
However, there are some downsides to savings accounts, too. A few to note, which may or may not apply to only the high-interest variety:
• They sometimes don’t allow consumers to use them for direct payments.
• There may be restrictions on the number of savings account transactions you initiate every month.
• There may be restrictions such as a balance cap that sets a limit on the amount of money on which you can earn a high rate.
• There could be a minimum opening deposit and ongoing balance requirements to earn the higher interest rate. Or, if you fail to meet the amount, you might be assessed a minimum balance fee, which could offset the extra interest you’re earning.
If you’re considering this as an option, you may want to look closely at the fine print when choosing your savings account.
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Hybrid Accounts: the Details
Hybrid bank accounts will often take benefits from checking and savings accounts and combine them into one account. A hybrid account may allow you to use checks or a debit card for day-to-day transactions, while still offering the interest rates typically associated with a savings account. Hybrid bank accounts are often more likely to be offered by online vs. traditional banks.
Traditional brick-and-mortar banks must pay for their storefront locations, the people who staff them, and ATMs. They may do so by charging more and/or higher fees and paying lower interest rates, while online banks can often afford to drop fees and pay higher rates.
You may hear the term money market account (or MMA) used by some financial institutions when describing their hybrid accounts. Keep in mind that this is different from a money market fund, which is a type of investment.
Introducing SoFi Checking and Savings
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
Better banking is here with up to 4.60% APY on SoFi Checking and Savings.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..
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Interest rates on certificates of deposit play an important role for some savers. CDs’ fixed rates can offer guaranteed returns for terms of several months or years. And locking in a high CD rate can mean earning strong yields even if the economy enters a low-rate environment. Here’s an overview of where CD rates might be headed.
Are CD rates going up?
Yes, but CD rates are rising more slowly this year than in 2022. Here’s a quick comparison: From January to October 2022, the best one-year CD rates rose from around 0.50% annual percentage yields to 3% APY. But from January to October 2023, the top one-year CD rates climbed from mid-4% APY to mid-5% APY, according to a NerdWallet analysis. Despite the slowdown, these rates are some of the highest in more than a decade.
Bread Savings™️ CD
Term
1 year
Barclays Online CD
Term
1 year
Discover Bank CD
Term
1 year
A big reason for the current rising-rate environment is the frequency with which the Federal Reserve has increased its federal funds rate. The Fed pushes up the target range of this Fed rate, which is the interest rate banks use to borrow money from each other, as one tool to curb inflation. Since March 2022, the Fed has raised its rate 11 times, with more increases in 2022 than in 2023. The last increase occurred after the Fed’s July 25-26 meeting
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Banks generally adjust their rates on new CDs in the same direction as Fed rate changes. Credit unions — the not-for-profit equivalent to banks — similarly raise rates on their CDs, known as share certificates.
“Rates are going up, but for CDs, [they’re] going up faster for credit unions than at banks,” says Dawit Kebede, senior economist at Credit Union National Association.
CD rate trends
High-yield CDs tend to be at online banks and online credit unions, which have rates that are whole percentages higher than national average CD rates. For example, the national averages are 1.79% for one-year CDs and 1.38% for five-year CDs. Top one-year yields are above 5%, and the best five-year CD rates are closer to 4%.
Short-term CD rates remain higher than long-term rates, for national averages and among high-yield CDs, according to a NerdWallet analysis. This phenomenon, known as as an inverted yield curve, can reflect that banks expect that future interest rates are headed downward.
CD rate forecast: 2023-2024
The Fed meets two more times this year: Oct. 31-Nov. 1, and Dec. 12-13. The likelihood of the Fed raising its rate in November is very low, but nearly one in four projections suggest that the December meeting will likely end in a small increase of 25 basis points, or 0.25 percentage point, according to the CME FedWatch Tool on October 24. CD rates may see a slight bump if the Fed pursues that increase, though it’s up to each bank and credit union as they consider rate changes to attract more deposits.
But 2024 might be the year that rates start to fall. The Fed’s fight against inflation is more likely to end in what’s known as a soft landing instead of a recession in 2024, according to a September forecast from the American Bankers Association’s Economic Advisory Committee. The committee consists of chief economists from some of the largest U.S. banks
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“If we have a soft landing scenario, where there is no significant damage to the economy, there is no reason for the Federal Reserve to keep rates up [at] a very restrictive range,” says CUNA economist Kebede, referring to the Fed rate’s target range. “By mid-next year, we may be closer to [the] inflation target, and then maybe the Fed will start cutting rates after that,” he says, noting that the direction of inflation or the labor market can affect this projection.
When the Fed rate drops, CD rates will likely drop too. But the drops might not be as drastic as they were after March 2020, when the Fed cut its rate to nearly zero. The Fed rate may drop more gradually over the next few years, according to the Fed’s September economic projections
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Take advantage of today’s CD rates
Lock in CD rates sooner than later. CDs are typically best for specific goals, such as protecting some savings from inflation’s effects or earmarking a fixed sum for a large purchase within five years, such as a car or house.
Don’t forget about specialty CDs. If you’re unsure about getting a CD now, some types of CDs offer flexibility. Bump-up CDs allow you to increase the rate at least once during a CD term, as long as rates on new CDs go up. No-penalty CDs give you a fixed rate plus the opportunity to jump ship for free.
Consider a CD ladder to hedge your bets. A CD ladder strategy reduces the stress around timing your CDs. Split up an investment equally into several CDs of different term lengths, such as one year, two years and three years. When each CD matures, reinvest in a longer-term CD or, if you need the cash, withdraw. Ideally, though, you can have multiple long-term CDs that mature at staggered intervals. You mix short-term CD access with long-term rates.
Compare other short-term ways to save and invest. For more everyday savings with the same low risks as CDs, consider a high-yield savings account or money market account, which have top rates above 5% APY. Or, if you’re looking to invest, consider more ways to invest your savings.