Every healthy financial plan includes some cash. Assuming you’re not stuffing it under the mattress—seriously, don’t do that—you may be wondering where to park it so you can earn the most.
Here’s a hint. It’s probably not your traditional savings account. The average yield on a savings account is now hovering around .06 percent, meaning you earn a whopping 6 cents for every $100 you deposit. Given the current rate of inflation is much higher (1.9 percent as of August), that means your money is actually losing value in most savings accounts. Worse: Some banks charge more in monthly fees than they pay you in interest, so you're actually losing money.
So, what other options are there?
There are some high yielding savings accounts—mostly online—that are offering up to 1.35 percent per year in interest. (Just make sure to read the fine print before you sign up to be sure you won’t end up paying for it with fees.)
But if you’re willing to put up with some more restrictions, you can beat that rate with a certificate of deposit (CD) or a money market account (MMA).
As with a savings account, you can take money out of your money market account whenever you need it—up to six times per month. But there’s often a higher minimum balance required (e.g. $100+). In return, you’ll get a slightly higher yield on your money: some are now offering 1.4 percent.
The other difference is that MMA funds are typically invested in very short-term, interest-bearing vehicles, which is why they’re able to pay a little more interest. But like savings accounts, they are FDIC-insured, so there’s little risk involved.
A CD provides a guaranteed return in exchange for the promise that you’ll keep your money there for a certain period of time. For instance, you can purchase a CD that will mature—or pay out the guaranteed interest—in one month, 10 years or a number of time periods in between. Not surprisingly, longer terms typically yield the highest rates.
A one-year CD is now paying as much as 1.5 percent (with a $500 minimum), while 5-year CDs offer more than 2 percent.
One drawback: If you need to withdraw your money before the maturity date, you may have to pay a hefty penalty.
The most important thing to consider is liquidity—meaning access to cash. If you have enough on hand to cover unexpected expenses in the meantime, a longer-term CD is probably your most profitable option.
But if there’s a chance you’ll need to access the cash quickly—like to cover a surprise medical bill or car repair—an MMA may be a better bet. You’ll be able to earn a little more interest, but you can tap it when you need it.