Where Should You Save and Invest Between Now and Next Year?

“During these hard times, what would be the best investment you could do with your money to make it grow bigger: money market account, CDs, or a high-yeild savings account?”

That was the question I recently received from a reader. Let’s discuss the question (i.e. where to invest) and the surrounding issues.

Savings vs Investment

In some ways, saving is investing. But for the most part, and definitely in the sense it’s being used in the question above, saving and investment are two different things. If you are expecting savings to “grow bigger”, especially in our current banking scene, then you are going to be waiting a while. Or worse, you’ll lose money.

Savings rates are by default lower than investing rates. Classic risk-reward. But since the Fed is keeping interest rates down at really low levels until late 2014, savings rates are going to remain significantly lower (between 0% and 1%) than we’ve seen in the past.

In the past, you could expect savings rates to remain at, or slightly above, inflation rates. Have you looked at inflation rates recently? Back in 2009 and 2010 they correlated nicely with our low savings rates. Not anymore. The inflation rate is back up around 3%. Unfortunately, savings rates didn’t follow.

Some argue that because savings rates are low, credit rates are low, saving us all money on things like mortgages, re-fi’s, car loans, student loans, etc. Not to mention, supposedly keeping the banks (and all of us who depend on the system) from imploding. With inflation rates back up, it’s hard to swallow that argument. It plain sucks for savers these days.

Where to Invest? Using MMAs, CDs, and Savings Accounts

These financial products, even with their dismal savings rates, are still a good option for certain situations. They provide liquidity (as long as you use no-penalty CDs) and protection (via FDIC). For many short-term savings goals, like an emergency fund, these tools still make sense. But they aren’t going to grow your money anytime soon.

Some have turned to high-yield reward checking accounts as an alternative to the savings account. These rewards checking accounts can pay up to 4% interest on a limited balance (typically around $20,000), plus you have to perform certain transactions to ensure you are actually using the account. At 4%, it’s looking like this is a smart move, and has been for the past year.

Another way to keep up with inflation, as someone recently suggested in this Ask.Metafilter thread, is to invest with I Savings Bonds from the U.S. Treasury. These currently pay around 3%, but you have to keep the bond for a year. If liquidity is not an issue for you, then this may be a good option.

But to really “grow” your money these days, you’ll have to put it at risk.

Grow Your Money by Investing

I’m putting my money into my retirement accounts and investing in a target-date fund. That’s how I’m making it grow, and that (investing in stocks and bonds) is pretty much the standard line you’re going to hear across the personal finance blog-o-sphere.

I also hope to invest some of my excess money in a rental property (converting our current place) in the next few months. Additionally, I’m always on the lookout for new business opportunities to invest in. If I was in a State that allowed me, I would probably look into doing some investing into the peer-lending industry.

What about you? What are you doing to grow your money? What are you using your high-yield savings account for?