What is the best way to earn interest with money I inherited?
My mother who was a retired federal employee passed away in March. My sister and I each received $40,500 which was placed into a total control account earning an effective annual yield of just 0.90 percent until I decide what to do with it. We are also waiting on her lump-sum retirement payout, so until that comes in I was thinking of using some of this money as a down payment on a house next year. However, until I decide what to do, what's the best way to earn more interest with this money?
You've suggested you plan to use the money for a downpayment on a home as early as next year. That should rule out investing it in the market, as we don't know how markets will react in the short term. It'd be a shame to invest it, and want the funds for a downpayment a year from now only to have less actual dollars to use!
Instead, consider using a high-yield online savings account. Nerdwallet always ranks their favorite high yield accounts, but some common ones are Marcus, Ally bank, and Synchrony. They offer higher yields than traditional banks and would get you the most bang for your buck. I believe they're around 1.5-1.7% currently.
These accounts are FDIC insured as well and work great for holding "emergency funds". We have all our clients typically hold 3-6 months worth of living expenses in such an account for a buffer against unexpected expenses
You didn't say which state you live in which is an important consideration. Especially if you live in a place with high state and local taxes like California and New York City, you should invest your money at TreasuryDirect.gov where you can currently get 2.24% for a six-month U.S. Treasury and 2.68% for a two-year U.S. Treasury. The interest is only paid upon redemption, and is free of state and local taxes. This is higher than you will get with most banks and both the principal and interest are guaranteed by the U.S. government. These are also the highest yields since 2007.
On a related topic, next year is not a good time to buy a house. Housing prices in the U.S. are substantially overvalued and will likely drop for four or five years. Wait until housing inventories are much higher and the media are asking how much lower prices will drop before buying.
Your time frame is fairly short, it is best to consider your guaranteed interest options so as not to risk the house downpayment funds.
A search of current online bank rates indicates that you could get 1.65% per year on savings and 2% for a 6 month CD, 2.3% for a 12 month CD. Checking with your local bank or credit union is a good idea as well, they may offer a special savings rate that would be higher than what is available with the online banks.
The simplest thing I can think of is to put it in a higher yielding savings account like the one at Live Oak Bank. They are currently paying 1.7% which is close to double of what you are receiving. I wouldn't suggest investing it if these dollars are meant to be used for a home down payment in the near term. You are better off with no market risk and getting a known commodity that a high yield online bank can offer. That would be what I think is in your best interest based off of what you described.