Financial Planning

Make the Most of Your Cash [Video]

Stash your cash here to get the most bang for your savings buck.

From online banks to credit unions, traditional banks and new savings apps, we have more avenues for saving our hard earned dollars than ever before.

But faced with so many options, choosing the “best” place to park our cash can feel perplexing. Even when we settle on a particular bank, we may be left with more questions. Should I opt for a savings account there or open a CD? When might a money market account make sense?

Whether it’s to afford a home, honeymoon, rainy day or all of the above, certain saving strategies can be more beneficial than others.

And while earning a return is nice, our savings plans need not always be fixated on achieving the highest savings rate. While some online banks may boast an annual percentage yield (APY) of 1% (wowee!), most deposit accounts today offer a lackluster interest rate that’s closer to nil. Beyond APY, we should aim for accounts that provide convenience, low to zero maintenance fees and perhaps even certain features that encourage us to save more.

If you’re scratching your head over the best place to stash your cash, here’s some guidance.

A Safe Place for Emergency Cash

We already know that online banks tend to offer consistently higher savings rates than brick and mortar banks, thanks to lower overhead costs. You can leave your rainy day cash there confident that you’re earning a better-than-average return. In fact, you can find yields as high as 1.25% at virtual banks, about 1% greater than at traditional banks, says Bankrate’s Chief Financial Analyst Greg McBride.

With money stored in an online account it’s easy to access your savings when you need it in a pinch. Here, you can keep the recommended six to nine months of living expenses tucked aside for an emergency such as unemployment, an unexpected medial bill or car breakdown.

Many virtual banks like Ally and Discover Bank provide ATM locations across the country where you can withdraw your funds for free. “These accounts are fully insured and fully liquid. You can also link an online account to your checking account for easy transfers,” says McBride.

That said, if you prefer the walk-in approach and like to interact with bank representatives in your neighborhood or want to access all your banking needs (i.e. loans, credit cards and savings) under one roof for convenience (since online banks don’t always offer a wide variety of banking services), an account at a traditional brick and mortar bank may prove more convenient. You may not earn the highest savings yield there, but it may mean having one less password to remember when checking your account online!

When to Opt for CDs

For longer-term savings with a time horizon of three to five years (think: a home purchase or pre-school for your newborn) certificates of deposit may offer better savings rates, says McBride.

The reason these accounts tend to offer a better yield is because you need to leave your money in the account for a period of time, say 12-months or 5 years. In general, the longer you let a bank hold onto your funds, the higher your rate will be.

A tip: It pays to cast a wide net in your search for the right CD, says McBride. “Comparison-shop among banks and credit unions. You can snag an additional percentage point of return just by shopping around.”

CDs also provide the added benefit of curbing impulsive withdrawals. By locking your money up in CD you’re generally not able to make a withdrawal prior to the account’s maturity date without facing a penalty.

When Money Market Accounts Make Sense

Not to be confused with a money market fund (which is an investment vehicle, more risky and not subject to FDIC insurance), a money market account is a type of savings account that tends to earn a higher rate of return of a little over 1.0% at many banks.

MMAs can be a great place to stash a large chunk of cash in exchange for a better-than-average return.

The reason for the slightly better rate?

These accounts typically require minimum deposits of $1,000 or higher and there tend to be restrictions on how frequently you can withdraw or transfer cash every month. Some accounts charge a monthly maintenance fee if your monthly balance falls below a certain dollar amount, too, so be sure to read all the fine print before signing up.

Have a lot of time between now and tapping savings? Shift to Investing.

If after setting up a rainy day account and tucking aside money for a big short-term expense you have more cash to put to work, you may want to consider taking on more risk.

If you can wait ten or more years before needing to withdraw the money, the best place to grow your funds is in a well-diversified, total stock market index fund, says McBride. “With the longer time horizon you can afford to ride out short-term volatility and harness the power of compounding higher returns.”

Investment experts like McBride tend to favor index funds for their very low expenses ratios and fees. The Vanguard Total Stock Market Index Fund, for example, has an expense ratio of 0.16%. That’s 84% lower than the average expense ratio of funds with similar holdings.

 

Have a question for Farnoosh? You can submit your questions via Twitter @Farnoosh, Facebook or email at farnoosh@farnoosh.tv (please note “Mint Blog” in the subject line).

Farnoosh Torabi is America’s leading personal finance authority hooked on helping Americans live their richest, happiest lives. From her early days reporting for Money Magazine to now hosting a primetime series on CNBC and writing monthly for O, The Oprah Magazine, she’s become our favorite go-to money expert and friend.