As US tariffs are set to increase inflation, it’s crucial to seek out investments that offer returns higher than the expected inflation rate. The current tariffs imposed by the Trump administration have disrupted markets, impacting employers, businesses, and consumer sentiment. It’s essential to take financial control by ensuring your savings are earning optimal returns and are placed in suitable accounts based on your requirements and time frame.
Despite the Federal Reserve’s decision to maintain its key lending rate, you can still secure a healthy yield on your cash savings. Economists predict that inflation, currently at 2.3% as of March, will rise this year due to the tariffs. Chief economist Joe Brusuelas forecasts inflation to exceed 4% later in the year. Therefore, it’s advisable to aim for returns that can match or surpass this anticipated inflation rate.
For readily accessible savings, consider FDIC-insured online high-yield savings accounts or online money market accounts which offer competitive interest rates compared to traditional brick-and-mortar banks. These accounts provide better returns, with some online savings accounts offering rates between 4% and 4.4%, significantly higher than the rates at major banks.
If you have funds earmarked for future expenses such as a down payment or retirement savings, you can lock in favorable rates through Treasury bills or notes with varying maturities. Holding these government securities until maturity ensures a rate of return higher than inflation while safeguarding your initial investment. Treasury bill yields range from 3.88% to 4.33%, while note yields range from 3.78% to 4.28%. Additionally, interest earned from Treasuries is exempt from state and local income taxes, making them a tax-efficient option for investors.
A region with high taxes. Note that selling a Treasury bond before it matures can result in a capital gain or loss based on the selling price. AAA-rated municipal bonds offer tax advantages, especially for individuals in high-tax states and those in the top income tax brackets. Interest earned on municipal bonds, issued by state and local governments, is typically exempt from federal income tax and may also be exempt from state and local taxes if purchased from your home state.
Highly rated municipal bonds have a strong history of meeting payment obligations on time, according to Robinson. Like Treasuries, the key to maximizing returns on a municipal bond is to hold it until maturity.
Certificates of deposit (CDs) from FDIC-insured banks are a secure option for investing money for a fixed term. CDs with various maturity periods were yielding over 4% on Schwab.com, with some one-year CDs offering returns between 4.5% and 5%. CD earnings are subject to federal, state, and local taxes, and early withdrawal penalties may apply if cashed out before maturity.
Money market mutual funds are currently averaging 4.14%, providing a convenient way to earn competitive yields on cash investments. These funds invest in government and corporate debt securities, typically maintaining a $1 share price. Returns may be tax-free if the fund invests in top-rated municipal securities from your home state.
Interest rates on debt, including credit cards and mortgages, have remained relatively stable. Credit card rates have increased slightly, with the average rate at 20.12%, but individuals carrying high-rate credit card debt can consider transferring balances to a 0% interest card for a limited period to facilitate faster debt repayment.
Mortgage interest rates as of May 1 averaged 6.76% for a 30-year fixed-rate mortgage. It is crucial to manage debt effectively regardless of any changes in interest rates set by the Federal Reserve.
Freddie Mac reported a slight decrease in mortgage rates this week, with rates now at 7.17%, down 0.05 points from the previous week and just below the average rate of 7.22% recorded last year around May 1. Looking ahead, rates for homebuyers are expected to remain in the range of 6.6% to 7%. Even if the Federal Reserve cuts rates, it may not necessarily lead to lower mortgage rates, as the Fed’s actions do not directly impact mortgage rates like they do with credit cards, explained Schulz.
When it comes to financing a car purchase, the current landscape is challenging. Car buyers are facing both high vehicle costs and borrowing rates, along with uncertainty over how tariffs may affect vehicle supply and pricing. In April, the average loan amount for a new car increased to $41,444 at 7.1% interest over 69 months, resulting in a monthly payment of $744. For used cars, the average loan amount rose to $28,855 at 10.9% interest over 69.5 months, with a monthly payment of $555.
Consumer insights analyst Joseph Yoon advises car shoppers to clearly differentiate between their needs and wants when considering a new car, such as size and desired features. It’s important to shop around for the best deals and compare loan offers carefully. Edmunds.com offers a car loan interest calculator to assist with these calculations.
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