Investors searching for income have many options these days, but choosing where to put their money isn’t necessarily as simple as going for the highest yield. The Federal Reserve’s latest rate-hiking cycle, which began in March 2022, has had the pleasant side effect of raising yields on otherwise boring assets, including short-term Treasury bills. To compete for investors’ dollars, banks have also boosted rates on high-yield savings accounts and certificates of deposit. Meanwhile, yields on money market funds have also ticked higher: The Crane 100 Money Fund Index touts a 7-day current yield of 4.92% as of June 18. Many people believe the period of Fed rate increases is winding down. The central bank held off on a June rate hike , but it indicated two more were coming later this year. That would push the benchmark rate to 5.6% . Before you start putting your money into income-producing products, first determine your overall investing goals and what you are trying to accomplish, said certified financial planner Jamie Hopkins, managing partner of wealth solutions at Carson Group. “We don’t invest in a vacuum,” he said. “We have reasons for it.” Also, understand why you are seeking income: Is it to improve returns, diversify your investments or is it an actual source of income? Your time frame – whether it is one year or 20 – is also an important factor, as is the amount of money you want to invest and how much liquidity you need with your investment, Hopkins said. Where the Fed stands in its rate-hiking cycle is also a key consideration. Some analysts and strategists have proposed adding longer-dated bonds – that is, going out 5 to 7 years or even 10 years – to portfolios to mitigate the reinvestment risk they’d face on shorter-dated issues if the central bank began cutting rates. “We are in a sweet spot now,” said Don Grant, a CFP and investment advisor with Sabre Wealth. “So, if you can find something that has liquidity or that you can lock in at around 5%… do it now.” Here’s what to consider when looking at ways to earn income right now. Treasurys You don’t have to take an excessive amount of risk to snap up attractive yield in the current interest rate environment. Three-month T-bills offer a yield of 5.2%, while 2-year Treasurys offer a rate of 4.7%. For short-term cash needs, T-bill ladders have given investors a way to earn some interest on otherwise idle cash. “You can buy a six-month T-bill and it’s 100% safe,” said Jordan Benold, a CFP at Benold Financial Planning. “The maturity is so short, and you get 5.3% on an annualized basis. It’s great income and safety, and if you’re still growing [your investments], it’s very uncorrelated to the stock market.” Money market funds Assets in retail money market funds grew to $1.99 trillion, according to the latest data from the Investment Company Institute . Investors might appreciate the convenience of money market funds – they’re easily available within your brokerage account – but they should be fee conscious, as high expenses eat away at returns. Further, even as money market funds offer relative safety, they can still face some risk. Remember that the Reserve Primary Fund slipped below its $1 net asset value during 2008, amid the great financial crisis. Some of the underlying holdings in the fund included commercial paper issued by Lehman Brothers, and the fund encountered redemption problems as investors rushed to cash out. Don’t confuse money market funds with money market accounts. Though money market accounts – which are offered by banks – are protected by the Federal Deposit Insurance Corporation, up to $250,000, money market funds are not. “They’re pretty safe, but they’re not insured, and that’s something that people are aware of in a way they haven’t been in a long time,” said Danika Waddell, CFP and founder of Xena Financial Planning. Certificates of deposit and high-yield savings accounts Liquidity should be a big factor for investors eyeing bank products like CDs and high-yield savings accounts. Depositors who are fine with locking up money in a CD for 12 months are rewarded with attractive yields. Consider that Bread Financial touts an annual percentage yield of 5.25% for a 1-year CD, while a BMO Alto CD offers a 5.1% yield for the same length of time. The trade-off is that you may forfeit some of your interest if you pull your money before the term. You can also shop around for CDs with no penalties, which are available at Ally Financial , CIT Bank — whose parent is First Citizens BancShares — and Synchrony Financial . All three banks offer 11-month instruments with yields exceeding 4% and no penalty. Waddell notes these CDs might be a good place to keep emergency funds. High-yield savings accounts offer easier access to your funds, but the rate isn’t quite as rich. Multiple institutions, including Ally, Capital One and Synchrony Financial are offering yields of at least 4%. The catch, of course, is that the bank can change the rate on your high-yield savings account, while you can lock in the rate on a longer-term CD. Both CDs and savings accounts are subject to the FDIC’s protection, but you should know the standard deposit insurance amount is $250,000 per depositor, per insured bank and per ownership category.
