Are You Saving Money in the Right Place?
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If you’re working toward a savings goal, you have many options for where to put your cash. Savings accounts, certificates of deposit (CDs), money market accounts, cash management accounts and investment accounts are all possibilities.
Which should you choose? That depends on how far away your goal is, how much you hope to earn on your cash and how often you want to access it. Here’s how to decide which savings or investment vehicle is best for you.
Factors to consider when stashing your savings
The features of different accounts can help you select the right savings vehicle. When deciding where to stash your savings, consider:
Access to withdrawals. Some accounts — such as CDs and retirement accounts — charge a penalty if the account owner withdraws money before a certain time. If you think you’ll need to access your cash soon, that will affect your account choice.
Interest rate. Some types of accounts offer higher interest rates or potential investment income than others. Both factors can vary depending on the bank or brokerage.
How far away your goal is. Think about how much you’ll need to save to achieve your financial goal and how long it will take you to get there. If it’s longer than several years, shift your mindset from saving to investing.
“Don't let your money just sit there and hibernate!” said Todd Christiansen, housing counseling and education manager at firm Money Fit by Debt Relief Services, via email. “If you won't need access to it in the next four or five years, let it grow your wealth in a CD, a bond fund or other financial product. Many savings might come with a fantastic promotional rate, but at the end of that 6- or 12-month term, the rate often deflates to below 0.2%.”
With these points in mind, check out these savings options.
Where to put short-term savings
Short-term saving goals will likely take less than a year to save for, like a vacation, small emergency fund or a home improvement project. Good options for that money include:
A high-yield savings account. These accounts, typically offered by online banks, tend to offer much higher interest rates than savings accounts at traditional brick-and-mortar banks. Though the return is lower than with savings vehicles such as CDs or investment accounts, you can access your cash as needed.
A money market account. An MMA is a savings account with some checking features, such as paper checks or a debit card. Interest rates for competitive MMAs tend to be similar to those of high-yield savings accounts.
A cash management account. CMAs — offered by brokerages rather than banks — typically have decent interest rates and some checking features, such as a debit card and ATM access.
Where to store medium-term savings
Say you want to save for something that may take a year or more, like a full three- to six-month emergency fund, large wedding or a down payment on a house. An account that keeps your money safe and separate and earns a little interest is the way to go. Note that the interest rates on these products usually don’t surpass inflation, so they won’t be optimal for building wealth.
“‘Out of sight out of mind’ is an appropriate description of mid-term savings products,” Christiansen said. “They let you effectively hide your own money from your impulsive self.”
Medium-term savings options include:
A high-yield savings account. Like short-term savings goals, medium-term goals are a good match for a high-yield savings account, since the funds are liquid.
A CD. If you know exactly when you’ll want to use your savings — say, to purchase a house two years from now — consider putting the funds into a CD that matures just ahead of that date, allowing you to earn a set amount of interest toward your financial goal. Note that most CDs charge a penalty if you withdraw your cash before the end of the CD’s term. If that’s a concern, you can also consider a no-penalty CD, offered at some banks.
MMAs and CMAs. MMAs and CMAs can be solid options here too. They have easy access, decent interest rates and useful checking features.
Where to keep cash for long-term financial goals
Maybe your goal is to save for or invest in something that will take a decade (or several), like retirement or your child’s college fund. Here are some good options for long-term goals:
An investment account. Over a long enough period, invested cash tends to earn the highest rate of return compared to other savings vehicles. A 2023 NerdWallet study found that 60% of Americans weren’t putting their retirement money into a retirement-specific account, which means they could be missing out on the tax advantages and high interest rates that these accounts provide.
If you’re saving for retirement, a vehicle like a 401(k) or an individual retirement account (IRA) will be the best way for you to invest your savings. However, retirement accounts carry early withdrawal penalties until investors are at least 59½ years old.
Another alternative: You can invest in a taxable investment account, which doesn’t have penalties for early withdrawal, though you may owe capital gains taxes if you sell investments.
A good rule of thumb is to keep cash invested for at least five years to weather potential stock market volatility; being able to invest for the long term can help offset such fluctuations.
A 529 plan. 529 savings plans are tax-advantaged investment accounts that allow parents to save money for kids’ college tuition and earn compounding returns. If you want to save specifically for education costs, 529s are worth considering.
Whatever your financial goals, you have solid options for where to stash your money and, ideally, see it grow.
