5 Places to Stash Your Cash
You are building your emergency fund, saving for a car or home down payment, or getting ready to retire and want to know where to park your short-term cash. Here are five options for you to consider depending on your timeframe for accessing the funds.
If you want your money to be completely liquid, consider high yield savings accounts, money market accounts or money market mutual funds.
High yield savings accounts
This type of savings account offers higher interest rates on deposits than local banks. Most offer easy online access and most don’t have a physical bank location or ATMs. Transfers between banks are easy to set up but can take a little longer – typically 24 to 48 hours. You can visit bankrate.com to see the current yields for many FDIC-insured high yield savings accounts. Current rates are 3.75%-4.30%. Please note that these rates will fluctuate and are not guaranteed.
Money Market mutual funds
Money market funds are investment products that allow consumers to earn interest in a lower-risk environment than the stock market. These funds hold a “basket” of securities that generate the gains and losses investors experience as shareholders. Money market funds usually hold securities like U.S. Treasury bonds, corporate bonds and other short-term, low-risk investments. Since money market funds are investment products, your investment could lose money, although it’s not very common for this to happen with money market funds. Be sure to get one that invests mostly in government treasuries to offset this risk. Money market funds typically earn interest slightly higher than a money market or savings account. Finally, money market funds have management fees, also known as expense ratios. These fees are stated as percentages and are deducted from your earnings. One example is VMFXX – Vanguard Federal Money Market Fund which has a 7-day SEC yield of 4.72% and an expense ratio of 0.11%. Your net yield would be 4.61%.
Money Market Accounts
By comparison, a money market account is an interest-bearing account that you can open at banks and credit unions. They are very similar to savings accounts but may require larger deposits (like $25k) and have fees. Deposits are insured by the FDIC and your account usually comes with checks or an ATM card.
Certificates of Deposits (CDs)
If you have already funded your emergency savings and want to sock away excess funds, then consider Certificate of Deposits (aka CDs). A CD is a deposit at a bank or credit union that earns a fixed rate of interest on a lump sum for a fixed period (from months to years). You must leave your money locked up for that agreed-upon timeframe, or you will be charged a penalty. CD interest is 100% taxable for state and federal in the year the CD matures. You can also buy brokered CDs through Vanguard, Fidelity, Schwab, or other brokerage accounts. You can visit bankrate.com to see the current CDs being offered by online banks or shop through your brokerage account. Here is a video on buying brokered CDs that I found very helpful. CDs can be a good option for money you don’t need for a while. Current yields are 5%-5.45% on the Vanguard site as of the writing of this article.
Series I Savings Bonds (aka “I Bonds”) are sold by the US Treasury and have an interest rate linked to inflation. Their composite interest rate adjusts every 6 months (on May 1 and Nov 1) for the I Bonds issued for the next 6 months. Their current annual composite interest rate is 6.89% until April 2023. March inflation data is expected to be released on April 12 and that is the last number needed to determine the inflation adjustment for the I Bonds ahead. While no one knows exactly what will happen come May 1st, it is likely that I Bond composite rates will decline in the future as inflation comes down. While there are still some good features of I Bonds (no state income tax, deferred federal tax, using funds tax free to college), you do have to hold the bond a minimum of 12 months and have a 3 month interest penalty if you cash in before 5 years. If you are looking for the highest fixed rate savings vehicles, you might want to consider CDs.
To learn more about the features of I bonds, read Cynthia’s article “Should I Buy an I Bond” or visit the TreasuryDirect website.
Please speak with your financial advisor to help you decide which is right given your unique situation.