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.