Whether you’ve come into an inheritance, earned a bonus at work or made a profit selling your house, having extra money gives you a chance to grow your savings and maybe fulfill a goal, such as saving up for a down payment on a new car. But deciding on the best place to stash your cash isn’t always easy.
Of course, you want some return on your money, but yield is not the first consideration. You should be looking for a very safe place to put your money, with a high degree of liquidity and minimal investment expense, says Kent Grealish, a fee-only investment planner at Grealish Investment Counseling in San Mateo, California. The return on your investment might be a factor, but it’s lower on the list in the short term.
“The yield isn’t really relevant because you get what you get. You don’t want to chase yield and give up either safety or liquidity,” Grealish says.
With that in mind, here are some options to consider:
- Money market account
- High-yield savings account
- Online savings account
- Certificate of deposit (CD)
- Checking account
- Treasury bills
- Short-term bonds
- Options with more risk, volatility
1. Money market account
If you want a safe place to park extra cash that offers a higher yield than a traditional checking or savings account, consider a money market account. Money market accounts are like savings accounts, but they typically pay more interest and may offer a limited number of checks and debit-card transactions per month.
Money market accounts offer easy access to your money, and they are safe if your banking institution is federally insured. Most banks and credit unions are insured by the Federal Deposit Insurance Corp. (FDIC) or the National Credit Union Share Insurance Fund (NCUSIF), giving individual account holders protection for up to $250,000 in deposits at a single institution.
If you don’t want to tie up your funds for a long time in a CD, a money market account can be a good alternative. There are usually minimum deposit requirements for opening a money market account or for getting the best annual percentage yield (APY). And be sure to ask about all fees you could incur, such as monthly account fees and penalties.
2. High-yield savings account
A high-yield savings account might pay more interest than a checking account, making it another attractive option. It can be a great place to build an emergency fund or save for a vacation or home repair while providing safety and liquidity.
But if you need to access portions of your money from time to time, a savings account’s restrictions might be a problem. Because of Federal Reserve requirements on bank reserves, you’re limited to six withdrawals or transfers per month from a savings account, and you may be charged a fee for subsequent withdrawals.
A high-yield savings account might offer a sign-up bonus or interest rate bonus, but you’ll likely have to maintain a minimum balance of $5,000 or $10,000 in the account to earn the higher rate.
3. Online savings account
Online banks typically offer higher interest rates than brick-and-mortar banks because without branch buildings to maintain, they have less overhead. A lot of online banks offer annual percentage yields of 2 percent or higher, while traditional banks still hover near 0 percent for savings account rates.
At many banks, you can open more than one savings account. This can be a good strategy if you are saving for different goals. When you are comparing online savings accounts, check for monthly service charges, minimum balance requirements, penalty fees, sign-up fees and other account terms that can cost you. Make sure the institution you choose is FDIC-insured. It’s also a good idea to choose an online bank that has a secure and user-friendly mobile app.
One potential downside to an online-only bank is there are no neighborhood bank branches.
“You can call and talk to somebody who can help answer your questions, but you don’t have a physical location where you can go and talk to somebody in person,” says certified financial planner Ben Wacek, founder of Wacek Financial Planning in Minneapolis.
4. Certificate of deposit (CD)
The main difference between a savings account and a certificate of deposit is the CD locks up your money for a set term. Withdraw the cash early, and you’ll be charged a penalty.
CDs also can be disadvantageous when interest rates are low.
“If you lock in a longer-term CD, it’s possible that a couple of years from now, you would’ve been better off if you’d kept the cash completely flexible in an online savings account,” says Wacek.
One strategy to grow your earnings is to open several CDs that mature at different times. This is called CD laddering. Laddering offers flexibility and less risk than one big CD with one maturity date. By having several short- and long-term CDs, you can take advantage of higher interest rates without too much risk but still have the flexibility to take advantage of higher rates in the future.
5. Checking account
A checking account at an insured bank or credit union is a very safe place to put your money. In addition, you have everyday access to the money through check-writing and ATMs. Deposits can be withdrawn at any time and there’s no risk to your principal.
If you want high yields, however, checking accounts are not your best choice because they typically don’t earn much interest. There are, however, checking accounts that offer decent yields. But if you need regular access to your money and don’t want it tied up for a period of time, a checking account is a good choice.
Fees typically are nominal or waived if you maintain a minimum balance, set up direct deposit or use your debit card a certain number of times each month.
6. Treasury bills
Most checking and savings accounts and CDs and money market accounts offer deposit insurance up to $250,000 — an important benefit.
But suppose you need to stash more than $250,000. In that case, you might want to look at U.S. Treasury bills, or T-bills, which are federal, short-term debt obligations with a maturity of one year or less. The longer the maturity, the more interest the investor earns.
“(They are) absolutely liquid and really cheap to buy and sell if you’re with a reputable firm,” Grealish says.
T-bills are sold on the secondary market, such as through a broker or investment bank, or at auction on the TreasuryDirect site. They are sold to investors for less than face value. T-bill yields hover around 2 percent.
T-bills are U.S. government debt, so there’s no risk you’ll lose your principal. “You can’t get a higher degree of safety than a Treasury bill,” Grealish says.
7. Short-term bonds
If you’re planning to park your cash for at least five years, consider options that are more like investments than savings. An investment might generate a higher return, but all investments come with the risk that you could lose some or all of your money.
“Your principal isn’t protected, so years from now when you want to take that money out, your principal potentially could be less than you originally put in. If you’re looking at five years or less, there is definitely more risk with that strategy,” Wacek says.
For example, a mutual fund that invests in short-term bonds might grow a little bit, but if interest rates rise, the value of the fund is likely to decrease. That’s because bond prices fall when interest rates rise. The longer the duration of a bond, the more vulnerable it is to rate fluctuations. That’s why some investors prefer short-term bonds.
8. Riskier options
Some people have a high risk tolerance, while others are comfortable only with safe investments, especially if they are retired or close to retirement.
Gold is a popular investment with some people, but it’s not a stable one.
Gold, which comes in bars, coins, jewelry, stocks and funds, is “actually a pretty risky investment,” says Wacek, “especially if it’s just a short-term holding spot.”
It doesn’t earn any interest or dividends that might offset a drop in the market price.
Grealish says any investment that claims to combine low risk and high return is probably too good to be true and should be avoided. “If something promises you great safety and liquidity and a high yield, there is something wrong,” he says. “That shouldn’t exist. There is no magic.”