Whether you’ve received a windfall or are determined to finally build a rainy day fund, getting serious about your savings is a task that deserves a place at the top of your list. Expert opinions vary, but spending three to six months of expenses as an initial emergency savings goal is still a great starting point. But choosing the right account to keep — and grow — your money can mean the difference between a pittance earned in a low-interest account and hundreds or even thousands of dollars. The intended purpose and amount of cash will determine which savings option is best.
When deciding where to stash cash, the obvious starting point is your bank account. Dominique Henderson, a certified financial planner and founder of DJH Capital, spoke to CNET about common options for parking large sums of money, especially for emergency savings. “Banks are the most common source of available cash for most consumers,” he said. “There may be nuances and/or refinements to this strategy, but when it comes to easy money.” [is concerned] – in 24 hours or less – the bank would be the best place.”
A savings or checking account may be a suitable option, but they are far from the only ones. When evaluating alternatives, keep in mind the liquidity of the account type—how easy it is to access your money—the interest rate, annual percentage return, or APY, and how safe your money will be against potential losses.
The following list highlights five lump sum savings options that you should have on hand in case of an emergency.
Money market accounts
A savings account with debit card access
Best APYs: 1.75%
Money market accounts are similar to high-yield savings accounts in that they offer higher-than-average APYs and provide immediate access to funds when needed. When offered through banks and credit unions, these accounts are insured up to $250,000 by the Federal Deposit Insurance Corp. APYs and interest rates are variable like savings accounts, however, money market accounts offer debit card and check writing features that provide greater access. to your cash if needed.
These accounts often offer a tiered interest rate, meaning interest rates increase as the account balance increases. They differ from savings accounts in that the minimum deposit is generally higher, there are monthly maintenance fees when minimum balance requirements are met, and some banks impose a monthly transaction limit. Like savings accounts, money market accounts are easy to set up and are offered across the board.
High Yield Deposit Accounts
Higher rates than traditional accounts
Best APYs: Up to 2.55% for High Yield Savings, up to 4.25% for High Yield Check
According to CNET sister site Bankrate, the national average savings account APY is 0.13%. When you consider that the current rate of inflation is 8.5%, keeping money in a low interest account works against you.
High-yield savings and high-yield checking accounts are most commonly found at credit unions, small community banks, or online-only banks. These accounts can offer variable APYs as high as 2.55% and 4.25% as they compete with larger banks to attract customers. High-yield checking accounts may include monthly transaction minimums and balance limits subject to higher APY rates, but will come with the ability to write checks or debit cards for instant access to cash. High-yield savings accounts may take several days to access cash through automated clearinghouse transfers.
High-yield checking accounts generally offer higher APYs than high-yield savings. The highest APY for High Yield Checking is currently 4.25% at La Capitol Federal Credit Union, but some accounts may require direct deposit or ACH transfer once a month, sign up for paperless statements, or have a minimum number of monthly debit card transactions. Andrew Latham, CFP and managing editor of Super Money, believes this is a win-win for both consumers and banks. “High-yield checking accounts provide consumers with a higher-than-average APY because financial institutions generate income from debit card interchange fees,” he told CNET.
Certificates of Deposit
Less liquidity in exchange for higher possible earnings
Best APYs: 3.00% for one year CD
A CD can be thought of as a savings account with a fixed rate and a stop sign attached. Money used to buy a CD will earn a higher APY than a traditional savings account if it sits untouched until the maturity date. CDs come in different flavors. Some allow you to put more money on the original CD. You can combine CDs into charts with different maturities. There are even CDs that will adjust the APY to match increases in available interest rates.
Traditional CDs offered by banks and credit unions require a minimum deposit that pays a fixed interest rate and APY, but require you to leave the money alone for anywhere from three months to five years to avoid early withdrawal penalties. This is great for getting a higher return on a safe deposit account because they are also insured up to $250,000 by the FDIC. However, traditional CDs are not as liquid if you need cash in an emergency.
Penalty-free CDs are alternatives that offer the benefits of increased CD rates with more flexibility over time constraints. Penalty-free CDs, as the name suggests, do not charge a fee to access funds until the CD reaches its maturity date. The trade-off for flexibility over time comes at the trade-off of lower interest rates and APYs offered.
Higher rates backed by the power of the US government
Current yield: 3.35% for 1 year T-bills
Treasury bills are one of four types of debt issued by the US government. This debt is used to finance the construction of capital projects such as the construction of schools, highways or bridges. You are essentially borrowing the federal government’s money. Because they are “backed by the full faith and credit of the U.S. government,” T-bills or T-bills are generally considered safe, low-risk investments. All earnings are exempt from state and local taxes, which may prove attractive to those who live in states or cities with high tax rates.
Treasury bills are short-term savings instruments that mature within one year and typically sell for $1,000. There are two ways to buy Treasury bills: directly from TreasuryDirect auctions or from a bank or broker in the secondary market. When buying directly from the government, the interest rate is set during the bidding process. A non-competitive bid, the easiest way to buy Treasury bills, guarantees that your bid will be accepted but does not set an interest rate until the auction ends. If you need to access cash before the T-bills mature, you can sell the note in the secondary market.
Series I savings bonds
Best for safe options that keep pace with inflation
Current interest rate: 9.62%
Like Treasury bills, earnings on Series I savings bonds or I bonds are exempt from state and local taxes. However, these bindings add something special. “When it comes to saving for an emergency fund, the best and safest option is to buy I Savings Bonds,” explains Michael Ryan, a financial coach with 30 years of experience in the financial planning industry. “Even Savings Bonds are government backed and safe and offer almost 10% interest.” I bonds are also a government security sold through TreasuryDirect. The current rate is fixed at 9.62% and will reset in October. These bonds earn a fixed interest rate that is partially linked to inflation. When the rate of inflation rises, the interest rate associated with the I bond adjusts so that the earning power of your savings is not absorbed by changes in the economy.
I bonds have a one-year lock-up period during which your money is not available. This period is followed by a five-year holding period. Bond collection during this phase will initiate a three-month, interest-bearing penalty. However, maintaining secured savings in an instrument that will keep pace with inflation may be worth the limited liquidity offered by these bonds.
Whether the funds come from an unexpected event or you create a plan to build your emergency savings over time, making decisions about where to keep your money can help your bottom line. Keep an eye on the rate of return offered by each account type and be aware that variable rates may change. You should also consider how easy it is to withdraw money from your account. Combining your savings between several different types of savings vehicles will give you the opportunity to earn better rates with longer savings limits, while giving you the flexibility to access cash quickly to cover unexpected expenses.