Guide to High Yield Investing

In practical terms, certain investments — like putting your money in a savings account, domestic certificate of deposit (CD), or a money market account — are risk-free or near-risk-free. So long as you don’t keep more than $250,000 in the same type of account with the same FDIC-insured financial institution, you won’t lose your money. So keep an eye on those limits. You may have to bank with more than one institution to enjoy the protection of FDIC insurance.

Once again, you have quite a few choices when trying to temper your financial risk. We’ve selected five investment options that qualify as low-risk / high-yield. Arguably, there are other low-risk opportunities out there. But we’ve selected what we consider the safest among the safest for those who are serious about protecting their wealth.

High-Yield Savings Accounts

Pros:

• Deposits are FDIC-insured
• High liquidity: you can access your funds whenever you need them

Cons:

• Comparatively low rate of return on your investment 
• Interest rates are subject to change

If you have a traditional savings account, you’re probably aware that you’re not earning oodles of money on your deposits. 

Interest rates fluctuate according to various factors, including the Federal Reserve rate, the demand for credit and inflation. Right now, traditional savings account interest rates are on the upswing. That’s because the Federal Reserve has hiked (and continues to hike) its interest rates and inflation has risen to a level where everyone is feeling the pinch. But the return on a savings account balance is still hovering at a paltry 0.23%.

But you may be able to get a much better deal if you open what's known as a high-yield savings account. Interest rates on high-yield savings accounts are currently over 3% and may even earn more than 4%, depending on where you bank.

So what’s the catch? Unlike traditional savings accounts, high-yield accounts may require an initial minimum deposit. The minimum deposit threshold can be quite high: some banks set it at $1,000 or more. In addition, you may be required to maintain a minimum balance or otherwise encounter certain fees. Little dings, such as overdraft fees, are typical with high-yield savings accounts. So if you’re shopping around for a high-yield savings account, be sure to compare requirements and fees, including monthly maintenance fees, to make sure you’re getting the best deal for your personal financial position. 

All that being said, high-yield savings accounts offer the same low level of risk as traditional savings accounts. They’re FDIC-insured, so as long as you only keep one savings account per bank with a balance below $250,000, your funds are protected.

CDs

Pros: 

• Guaranteed fixed return 
• Wide selection of terms and rates
• FDIC-insured

Cons:

• Less liquid than savings or money market accounts
• Early withdrawal penalties may apply

CDs, or certificates of deposit, are another safe, FDIC-insured investment. Currently, CD rates are competitive with high-yield savings account rates. But when you purchase a CD, you must commit to staying invested for a period of time ranging from just a few months to ten years. The longer you commit to keeping your funds in a CD, the higher the interest rate you’ll earn. However, if you withdraw your money from a CD before its maturity date, you will be subject to penalties. 

Penalties for early withdrawal can be steep. If you purchase a short-term CD — say with a three-month maturity date — and withdraw your funds early, you’ll basically sacrifice all of the interest you’ve earned while you held the instrument. With a one- to seven-year CD, if you withdraw your funds within the first year, you’ll lose 12 months of your expected earnings. If withdrawn after one year, you can lose as much as 30% of your expected earnings for the full term of the CD. So it’s best to purchase a CD for a period when you can be sure you won’t need access to your funds.

So why would someone choose to buy a CD rather than stash their cash in a high-yield savings account? The primary reason is that if you hold your CD for its entire term, you’re guaranteed to earn the rate you bargained for at the time of purchase. High-yield savings account interest rates, by contrast, can fluctuate considerably over the same period of time. 

Money Market Accounts

Pros: 

• Higher interest rates than checking accounts
• Full liquidity
• May come with a debit card and/or paper checks
• No penalties for early withdrawal

Cons:

• High minimum deposits may be required
• Limited number of free transactions per billing cycle
• You may be charged maintenance fees if you don’t maintain a minimum balance

Money market accounts offer a combination of security and liquidity. The funds held in a money market account are protected by FDIC insurance. Plus, you have 24/7 access to your funds. In fact, some money market accounts come with debit cards and paper checks. 

But it’s best not to use your money market account the way you would a checking account and here’s why. With a money market account, you’ll typically be limited to a certain number of free withdrawals or transfers per statement cycle — usually six. Make more than six and you’ll pay additional per-transaction fees. 

In addition, money market accounts may come with minimum balance requirements. Fall below your minimum balance and monthly maintenance fees may be deducted from your account. 

Money market interest rates may be slightly higher than high-yield savings account rates. But the two investment vehicles share one similarity: interest rates for both fluctuate and you are not guaranteed steady earnings.

Treasury Bills

Pros: 

• Guaranteed by the US government
• Short-term investment (up to one year)
• Fixed interest rate
• Low price of entry: minimum commitment of $100
• Typically offer higher interest rates than savings accounts and money market accounts

Cons:

• Funds are not liquid
• May yield lower returns than long-term CDs
• T-bill interest rates fluctuate, subjecting you to opportunity risks

Treasury bills, commonly known as T-bills, are securities issued by the Treasury Department and are backed by the full faith and credit of the US government. T-bills are regulated by the Securities and Exchange Commission, as well as the Financial Industry Regulatory Authority (FINRA), which designates and enforces rules for registered brokers and brokerage firms.

T-bills are short-term investment vehicles. You can buy a T-bill that matures in just a few days. And the maximum term of a T-bill is 52 weeks. Unlike the funds you put in a savings account, your T-bill investment offers a fixed interest rate for its term and cannot be withdrawn before maturity. But you’ll earn more with a T-bill investment than you would with a high-yield savings account or checking account. In March 2023, the interest rate for a three-month T-bill was 4.63%. 

T-bills may be purchased directly from the government or on the secondary market. If you purchase your T-bills from a brokerage firm, your investment is protected by SIPC insurance up to $500,000. So if your brokerage firm fails, you won’t be hung out to dry.

Other advantages of T-bills include a low cost of entry. Just $100 can put you in the T-bill game. And there’s no limit on how much you can invest in T-bills. But if you buy T-bills through a brokerage, just be careful not to exceed a $500,000 investment with one firm, or you’ll lose your SIPC protection.

In addition, your T-bill earnings are exempt from state and local income taxes. Depending on how much you earn and where you live, your tax savings could be substantial.

Series I Savings Bonds

Pros: 

• Guaranteed by the US government 
• Designed to protect your investment from inflation
• Pays two kinds of interest: a fixed rate and an inflation-adjusted rate

Cons:

• Annual limit on how much you can invest
• Interest rate can change every 6 months
• Long maturity dates
• Limited liquidity: no withdrawals for the first year

Series I Bonds aren’t as widely known as T-bills. The financial press doesn’t report on them as regularly, but they’re another form of government-backed security that carries low-risk compared to many other investments you can choose.

Unlike T-bills, Series I bonds are relatively long-term investments. The shortest term for an I bond is 5 years. But I bonds can continue to earn interest for much longer if you don’t cash them in up to 30 years.

You must hold on to your Series I bond for at least one year. So right off the bat, an I bond is less liquid than many other low-risk investments. After one year, you can cash in your bond prior to its maturity date, but penalties will apply. Early withdrawal penalties are lower, however, than they are with CDs, for example. After a year, you will only lose three months of interest no matter how far in advance of your bond’s maturity date you decide to cash out.

I savings bonds earn interest monthly and interest is compounded semiannually. Interest is rolled into the bond’s principal, so you earn more interest the longer you hold on to them. 

The interesting thing about I bonds, if you’ll pardon the pun, is that they pay two kinds of interest. You earn a guaranteed interest rate for the first six months that you hold the bond. But every six months, the rate is adjusted according to the current rate of inflation. That new rate is called the composite rate. When the inflation rate goes up, so does the amount of interest you earn on each dollar you’ve invested. That’s why I bonds are considered a great hedge against inflation — something everybody could use right about now, right? But the reverse is also true. You may earn less interest when inflation subsides.

Series I bonds return at a higher rate than T-bills. In March 2023, I bonds were delivering 6.9% at inception. That rate will be adjusted, but the composite rate on Series I bonds is predicted to rise. 

All that sounds like a pretty great deal for a security that’s federally guaranteed. But there is one drawback to investing in Series I bonds. Unlike T-bills, I bonds are not an all-you-can-eat buffet. You can’t go back for seconds right away. The Feds limit the amount you can invest in I bonds to $10,000 per calendar year. 

You can buy Series I bonds directly from the government when you open a TreasuryDirect account. The minimum purchase is $25. That makes the investment vehicle a great choice if you’re new to investing or simply don’t have a lot to invest. Unlike T-bills, you can’t buy Series I bonds on the secondary market.