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 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:
- High-yield savings account: Best for easy access and earning higher than average interest
- Certificate of deposit (CD): Best for earning a fixed rate
- Money market account: Best for those who want check-writing privileges
- Checking account: Best for storing disposable income
- Treasury bills: Best for savings balances above $250,000
- Short-term bonds: Best for those okay with more risk in exchange for higher returns
- Riskier options (stocks, real estate and gold): Best for those looking for long-term investments
1. High-yield savings account
A high-yield savings account is an attractive option for those who want to grow their savings while also having fairly easy access to the money just in case.
To put the earnings into perspective, a traditional checking account will likely yield you a measly 0.01 percent APY or less. Meanwhile, the highest paying high-yield savings account earns around 1 percent APY.
A high-yield savings account can be a great place to build an emergency fund or save for a vacation or home repair while providing safety and liquidity.
If you need to access portions of your money from time to time, a savings account’s restrictions might be a problem as there’s a limit of six withdrawals or transfers per month per Federal Reserve requirements on bank reserves. However, this rule is currently not in place due to the coronavirus crisis.
Another thing to note is that 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.
2. 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. However, they protect savers from falling interest rates as they allow you to lock in at a fixed rate.
“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 Ben Wacek, founder of Wacek Financial Planning in Minneapolis.
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.
3. 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.
4. Checking account
A checking account at an insured bank or credit union is a very safe place to put your money; however, it’s not necessarily the best place to save your money.
Instead, checking accounts should be primarily used for storing your disposable income, a.k.a. the money you use to purchase everyday, necessary expenses. Checking accounts are highly liquid and come with check-writing privileges, ATM access and of course, debit cards. Deposits can be withdrawn at any time and there’s no risk to your principal.
While it’s not common, there are checking accounts that offer decent yields. Nonetheless, these types of accounts should not be your main place for storing savings.
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.
5. Treasury bills
Most checking and savings accounts, as well as CDs and money market accounts, offer deposit insurance up to $250,000. This is 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-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.
6. 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 typically 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.
7. Riskier options: Stocks, real estate and gold
Some people have a high risk tolerance, while others are only comfortable with safe investments, especially if they are retired or close to retirement.
Stocks, for example, can lead to high returns, though investors will need to bear the inevitable ups and downs of the market. A good place to get started is with an S&P 500 index fund, which includes the largest, globally diversified American companies across every industry. This tends to make it less risky than other investing options and has returned about 10 percent annually over time to investors.
If you are looking to make a long-term investment, you may want to look into buying a home and potentially renting it. Now is a particularly good time to buy a home with mortgage rates at record lows; however, this has led to a housing shortage so it may be tough competition when it comes to securing a property.
Another popular investment option — especially during tough economic times — is gold. Some investors see it as a safe place to park their money while others are a bit more skeptical. Nonetheless, the decision to invest in gold should be a personal one.
Use a financial planner to help you decide
When deciding where to put your extra money, it’s a good idea to think about how it ties into your overall financial plan. Having a plan in place will provide you with clarity to manage your money that you’ll be thankful for not only now, but especially in the future.
When coming up with a plan, consider seeking out expert advice from a financial adviser — especially if you have more complicated money questions regarding topics like estate planning. More specialized topics can be hard to navigate and there’s no shame in getting a second opinion and some guidance.
It’s also important to note that you should do some research before settling on a financial adviser: You want to ensure that he or she is a good fit for you and your situation. First and foremost, always make sure that your financial adviser is a real fiduciary who is acting in your best interest.
By putting your financial plan into focus, you can more easily decide on what saving strategies work for you and your situation.