Saving up a significant cash savings or an emergency fund capable of holding 12 months of living expenses is a Herculean effort in of itself. Once you have managed such a feat, the next question becomes what do you do with the money? Having it sit inside a big bank account earning 0.20% interest doesn’t seem like a wise use of your funds. While an online savings account is a step in the right direction, those are only earning around 1% these days. If inflation is 3%, you are still losing money every year.
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Beating inflation is difficult. You could consider investing in the stock market, but picking stocks is hard and highly risky. To generate a higher percentage of growth while still limiting some risk you have three options: Certificates of Deposit, Peer-to-Peer Lending, and Rewards Checking.
The least risky option to try and beat inflation with your money is to stick the it into a certificate of deposit with a reputable, FDIC insured institution. The amount of interest you can earn is dictated by interest rate policy by the government. Shorter term CDs offer the same interest rates as online savings accounts (about 1%) but lack the liquidity of a savings account. Longer term certificates of deposit generate higher interest. However, to beat inflation you would need to lock up your funds for a long time (over 3 years) to even get close to 3%.
Pros of using CDs:
Cons of using CDs:
The most risky option is the one that can generate the highest reward for your money. You can decide to become a lender to other people through a peer-to-peer lending service. With P2P lending you take on the role of a banker and decide to lend money to other individuals who post on why they need the money. The P2P service checks the borrower’s credit and sticks them into a risk profile. The higher the risk, the higher the interest rate you can earn.
Pros of Peer-to-Peer Lending:
Cons of Peer-to-Peer Lending:
When most people hear rewards checking account they think of accounts where you get cash back or points for swiping your debit card. There is a different type of account that many smaller banks and credit unions are utilizing to market themselves and to drive up deposits. The rewards come in the form of interest on the checking account, but the rate is much higher than most saving accounts.
The rewards do come with stipulations: generally you must swipe your card 10 to 12 times per month, you must sign up for and access electronic statements, the high interest rate is limited to usually the first $25,000 you have deposited, and you must have 1 direct deposit or ACH debit every month. If you can complete these relatively simple tasks, you can be rewarded with rates ranging from 2% to 4% depending on the bank.
Pros of Rewards Checking Accounts:
Cons of Rewards Checking Accounts: