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.
Return on investment is an important factor to consider, but liquidity and the length of time before you need to access the cash are also important. Safety and investment costs should also be considered when determining where you should save your money.
With that in mind, here are some options to consider.
1. High-yield savings account
A high-yield savings account is an attractive option for those who want to grow their savings while having easy access to the money, just in case.
To put the earnings into perspective, the yields on traditional savings accounts are typically very low, as little as 0.01 percent APY. But the top high-yield savings accounts earn above 1 percent APY.
You can open a savings account to build an emergency fund or save for a vacation or home repair while having safety and liquidity.
If you need to access portions of your money from time to time, savings account restrictions might be a problem. There could be a limit of six withdrawals or transfers per month, depending on the bank’s policies.
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 sizable minimum balance 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 that a CD locks up your money for a set term. If you withdraw the cash early, you’ll be charged a penalty.
CDs can be disadvantageous when interest rates are low. But they also protect savers from falling interest rates because they allow you to lock in a fixed rate.
Though longer-term CDs offer better interest rates, you’re unable to access the funds during that time without paying a penalty in most cases.
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 and 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
Instead, checking accounts should be primarily used for storing the money you spend on everyday, necessary expenses. Checking accounts are highly liquid and come with check-writing privileges, ATM access and debit cards. Withdrawals can be made at any time and there’s no risk to your principal.
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, 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.
T-bills also have the advantage of being liquid and easy to buy and sell. Plus, they are extremely safe with no risk of losing principal, since they are debt owned by the U.S. government.
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.
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.
Unlike Treasury bills, short-term bonds don’t protect the principal. You could find that when you withdraw your money, you not only didn’t gain interest, but also lost some of the principal.
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. However, mortgage rates are rising, inflation is high and there is a housing supply shortage, so finding and securing a suitable property could be more difficult.
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 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, think about how it ties into your overall financial plan. Having a plan in place will give you clarity.
Consider seeking expert advice from a financial advisor, especially if you have questions regarding complicated topics like estate planning. More specialized financial topics can be hard to navigate and there’s no shame in getting a second opinion and some guidance.
Do some research before settling on a financial advisor. You want to ensure that the expert you choose is a good fit for you and your situation. First and foremost, always make sure that your financial advisor is a real fiduciary who is acting in your best interest.
Focusing on a solid financial plan makes it easier to decide which saving strategies work best for you.
— Bankrate’s Libby Wells contributed to an update of this story.