- Before you decide where to place your savings, identify your goals for the money.
- Depending on when you need access to the savings, you could use a mix of accounts.
- There usually is a trade-off between safety and returns.
You’ve worked out a budget, and you’ve managed your spending. Now, you’re ready to start saving and you want to find the best place for your money. So, what are your options beyond a traditional savings account in a brick-and-mortar bank?
You just might take a page from the millionaires’ playbook and diversify your savings portfolio. That means using a variety of accounts to try to get the best interest rates while serving other purposes.
At times like this, it can be hard to know what to do next with your personal finances or to see the progress you’ve made. That’s why Best Egg Financial Health gives you the tools and knowledge to take full control, make confident financial decisions, and reach your goals—with no judgement, ever.
Saving vs. Investing
The words “saving” and “investing” are sometimes used interchangeably, but they differ in terms of risk, accessibility, and longevity. Indeed, the biggest difference between saving and investing is risk. The key to saving is that the money is there when we want it. They key to investing is that the money grows.
Many types of savings are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000. You’re not likely to lose money, as you can when you invest in the stock market. The trade-off is that the safer the vessel is, the lower the returns. A traditional savings account in a bank or credit union will offer a modest interest rate. The savings earn interest of a fraction of a percent each year. Stock, which is a share of a company, could pay annual dividends and increase in value many times over as the company grows and thrives. But if the company fails, the stock’s value—and your investment— could disappear.
When you save, you want to be able to pull that money out at your discretion. If you save money for an emergency fund, you must be able to get at it quickly. Compare withdrawing money from a bank to the effort and time it can take to get your money out of a real estate investment.
Savings are often based on the near future, while investments are more likely to be tied to the distant future. For example, you might save for a vacation next year, or a down payment on a house in five years. On the other hand, you might invest money in a stock-based mutual fund for 30 years to prepare for your retirement. If you left money in a savings account for decades, you might lose value because the inflation rate was higher than your account’s interest rate. Investing long-term, on the other hand, gives time for recovery from downturns for an overall higher return.
Goals for saving
When deciding where to put your hard-earned savings, consider the following:
- What are your savings goals?
- How quickly will you need access to the money, and how much will you need at any given time?
- What are the account requirements (minimum deposits, minimum balances, fees, withdrawal restrictions, tax implications, etc.)?
- What protections or safeguards are available for your money with each account?
Keeping all that in mind, here’s a look at a dozen options for savings:
Traditional savings account
Kids used to receive an actual piggy bank when they opened a savings account. While these accounts at banks and credit unions are still known as a safe harbor for savings, they’re now more likely to come with ATM access, plus online savings transfers and other digital services. The money in a savings account is insured up to certain limits by the FDIC. Look for institutions that include “Member FDIC” on their materials. A key point of comparison is the annual percentage yield, which shows how much interest the money will earn in a year. Also, look for accounts that do not charge monthly fees.
High-yield savings account
This type of account should provide higher interest rates than a traditional savings account but might require higher minimum deposits or balances. A high-yield savings account is a good place to save money that you might need to access quickly. Your high-yield savings provider might limit the number of withdrawals you can make each month. However, that could help keep you on track with your savings goals.
High-yield checking account
The best high-yield checking accounts can be an attractive place for savings, too. Unlike a savings account, interest-bearing checking accounts generally come with a debit card and check-writing privileges. These accounts have no restrictions on the number of transactions you can make in a month. They provide ease of access while earning interest, but may have requirements such as a minimum balance or making monthly direct deposits.
Money market savings account
Money market accounts pay interest rates that are competitive with savings and high-yield checking accounts. These accounts usually require higher opening deposits and minimum balances, typically a few thousand dollars. A money market account might also offer the ability to write checks.
Money market mutual funds
Money market funds are not bank accounts. They are a way of investing in low-risk securities, typically cash, municipal bonds, bank debt securities, and U.S. Treasury bills, notes, and bonds. The returns tend to be similar to high-yield savings accounts, but they are not guaranteed. Some funds advertise having no fees or minimum deposits, while others require thousands of dollars in the account and charge fees based on the size of the account. These are considered a safe place to park money for the short term.
Certificates of deposit
With a CD, you deposit money with a bank to lock it up for a set period of time, such as 3 months, 6 months, or a year. It earns a fixed interest rate for that period. There can be hefty penalties for early withdrawals.
A CD ladder involves buying CDs of different maturities. For example, if you buy CDs with maturities of 3 months, 6 months and 9 months, you’ll have a 3-rung CD ladder with CDs maturing every three months. The regular maturity schedule gives you predictable access to your savings and helps avoid early withdrawal penalties. As CDs in your ladder mature, you can reinvest those funds into a new CD, hopefully at a higher interest rate. The rates tend to be much higher than rates for traditional savings accounts.
Savings bonds and treasury bonds
Savings bonds and treasury bonds are issued by the U.S. government to raise money. These investments are considered very safe because they are backed by the full faith and credit of the government.
Individuals can buy savings bonds from the Treasury Department or through banks and credit unions. They earn interest for 30 years, but you can redeem them after 1 year. However, if you redeem them before 5 years, you lose the past 3 months’ worth of interest. (If you cash in a bond after 24 months, for example, you get 21 months’ worth of interest.) Through at least October 2022, new Series I savings bonds had an interest rate of 9.62 percent. The Series EE bonds were paying an interest rate of 0.10 percent. However, if you hold a Series EE bond for at least 20 years, the government guarantees that you will double your money.
Treasury bonds, notes, and bills pay interest in different ways and have different maturity dates. T-bonds offer the highest returns but take 20 to 30 years to mature. T-notes take 2 years to 10 years to mature. T-bills mature in 4 weeks or up to a year.
A bond is a low-risk debt investment issued for a specified time and fixed interest rate by companies as well as government bodies. In exchange for the “loan,” the bond issuer pays interest for the life of the bond and returns the face value of the bond at maturity.
Each bond has varying degrees of risk, as well as returns and maturity periods. Also, penalties may be assessed for early withdrawal and commissions may be required.
Investors can buy bonds, including U.S. bonds, when they are first issued, or through the secondary market. That increases the accessibility that investors have to their money.
Individual Retirement Account (IRA)
IRAs are best if you: a) don’t have an employer-sponsored account with a match, or b) want additional retirement savings to go with your company’s account. There are 2 main types of IRAs: traditional IRA and Roth IRA. With a traditional IRA, you don’t pay taxes now, but you pay taxes when you withdraw funds later. With a Roth IRA, you pay taxes as you invest, but not when you take out money. IRAs are designed to be used during retirement, unless you have an outstanding circumstance that would prompt you to take out funds early. However, early withdrawals can bring penalties and negative tax consequences.
A 401(k) plan is a retirement savings plan offered by employers that comes with built-in tax advantages. You agree to have a small percentage of your paycheck paid directly into an investment account, before taxes are taken out. Plus, your company may match part or all of that contribution. The typical plan gives employees a range of investment options, with mutual funds being a popular option. Like an IRA, a 401(k) is intended for long-term savings.
Health Savings Account (HSA)
A Health Savings Account is a pre-tax savings account designed to pay for qualified medical expenses. You can use your HSA to pay for deductibles, copayments, coinsurance, and some other expenses. You can deposit a fixed amount into your health savings account directly from your paycheck into an interest-bearing account.
HSAs allow money to be rolled over from year to year, and employees keep the money even if they leave the employer. After the account holder turns 65, the money can used for any expense. Withdrawals will be taxed as income, unless they’re used for qualified medical expenses. In that case, the withdrawal will be tax free.