Why High-Yield Savings Options are Risky in 2023

While interest rates have risen sharply over the past year, chasing the highest yields isn’t always the wisest move.

CDs, savings accounts, and bonds offering 4-6% or more seem appealing on the surface but often come with fine print that puts your money at risk. It pays to be prudent in 2023.

Take “high-yield” CDs, for example. To get the best rates, you typically need to lock up your money for 3-5 years. But over that time period, interest rates could easily drop again, leaving you stuck with a subpar yield and facing penalties if you withdraw early.

The same logic applies to long-term savings accounts and bonds. By chasing the highest rates today, you risk losing out if the Fed cuts rates again in 2024 as expected.

Some “high-yield” options also lack important safeguards.

Online banks offering 4% or more on savings, for instance, frequently have lower balances insured by the FDIC. If the bank fails, you could lose money.

And while I-bonds offer tax benefits, you forfeit 3 months of interest if you cash in before 5 years. If rates rise in the interim, that penalty may exceed your returns.

A prudent approach is to avoid locking all your money into any single option, especially long-term ones.

A balanced strategy—with some money in short-term CDs or savings, some in intermediate options like 2-year CDs or I-bonds, and some still accessible—gives you flexibility to get the best rates over time while mitigating risks. As the Fed cuts rates again, you can move money into better-yielding alternatives.

Don’t get distracted by flashy numbers today. With a balanced, flexible strategy, you can achieve solid risk-adjusted returns despite an uncertain rate environment. Your patience and prudence will pay off.

Category: Finance

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