Whether you’ve received a financial windfall or are resolved to finally build that rainy-day fund, getting serious about your savings is a to-do worthy of a spot at the top of your list. Expert opinions vary, but socking away three to six months’ worth of expenses as an initial goal for emergency savings is still a great starting point. Selecting the right account to keep — and grow — your money, however, can make the difference between a paltry amount 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 your 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 for accessible cash for the majority of consumers,” he said. “There can be nuances and/or enhancements to this strategy, but as far as readily accessible cash [is concerned] — in 24 hours or less — a bank would be the best place.”
A savings or checking account can be appropriate options, but they are far from the only ones. When reviewing alternatives, keep in mind the account type’s liquidity — how easy it is to access your money — the interest rate, the annual percentage yield, or APY, and how safe your money will be from potential losses.
The following list highlights five savings options for a lump sum that should be kept on hand for emergencies.
Best APY: 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 by up to $250,000 by the Federal Deposit Insurance Corp. The APY and interest rates are variable like savings accounts, however, money market accounts offer debit card and check writing features to provide more access to your cash when needed.
These accounts often offer a tiered interest rate, meaning the interest rates rise as the account balance increases. They differ from savings accounts in that the minimum deposit is generally larger, monthly maintenance fees are applied if minimum balance requirements are met, and some banks impose a monthly transaction limit. Like savings accounts, money market accounts are easy to establish and are offered across the board.
Best APY: Up to 2.55% for high yield saving, up to 4.25% for high yield checking
According to CNET’s sister site Bankrate, the national average for a savings account APY is 0.13%. When you consider the current inflation rate is at 8.5%, keeping money in a low interest-rate bearing account is working against you.
High yield savings accounts and high yield checking are most commonly found at credit unions, small community banks, or online-only banks. These accounts can offer variable APYs of up to 2.55% and 4.25%, respectively, as they compete with larger banks to attract customers. High yield checking accounts may include monthly transaction minimums and cap the balances which the higher APY rates apply, but will come with check writing abilities or debit cards for immediate access to cash. High yield savings accounts may take a few days to access cash through automated clearing house transfers.
High yield checking accounts generally offer a higher APY 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 a direct deposit transfer or ACH transfer once per month, opt-in for paperless statements or have a minimum number of monthly debit card transactions. Andrew Latham, CFP and managing editor of Super Money, feels this is a win-win for consumers and banks. “High-yield checking accounts give consumers a higher-than-average APY because financial institutions generate interchange fee income through the use of the debit card,” he told CNET.
Best APY: 3.00% for 1-year CD
A CD can be thought of as a fixed-rate savings account with a stopwatch attached. Money used to purchase a CD will earn a higher APY than a traditional savings account if left untouched until the maturity date has expired. CDs come in a variety of flavors. Some will allow you to deposit more money into the original CD. You can combine CDs into ladders with varying maturity dates. 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 anywhere from three months to five years to avoid early withdrawal penalties. This is great for earning a higher return in a safe deposit account because they are also insured up to $250,000 by the FDIC. Traditional CDs, however, aren’t as liquid if you need the money in a pinch.
No-penalty CDs are alternatives that offer the benefits of increased CD rates with more flexibility over time restrictions. No-penalty CDs, as the name suggests, don’t charge a fee to access funds before the CD reaches the maturity date. The exchange in flexibility over time comes at a tradeoff of lower interest rates and APY offered.
Current yield: 3.35% for 1-year T-bill
Treasury bills are one of four types of debt issued by the US government. This debt is used to fund the construction of capital projects such as building schools, highways or bridges. You’re essentially loaning the federal government money. Because they’re “backed by the full faith and credit of the US government,” Treasury bills, or T-bills, are generally regarded as secure, low-risk investments. All earnings are exempt from state and local taxes, which may prove attractive to those living in states or cities with high tax rates.
T-bills are short-term savings instruments that mature in a range of time frames of up to one year and are generally sold in $1,000 increments. There are two ways to purchase T-bills: directly from TreasuryDirect auctions or from a bank or broker on the secondary market. When buying directly from the government, the interest rate is set during the bidding process. A noncompetitive bid, the simplest way to purchase T-bills, guarantees your bid will be accepted but doesn’t set the interest rate until the auction closes. If you need to access cash before the T-bill matures, you can sell the note on the secondary market.
Current interest rate: 9.62%
Like T-bills, earnings from Series I savings bonds, or I bonds, are exempt from state and local taxes. However, these bonds 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. “I Savings Bonds are government-backed and safe, and they offer nearly 10% interest.” I bonds are also a government-backed security sold via the TreasuryDirect site. The current rate is fixed at 9.62% and will reset again in October. These bonds earn a fixed interest rate that is partially tied to inflation. When inflation rates rise, the interest rate attached to an I bond adjusts so the earning power of your savings is not eaten away by changes in the economy.
I bonds have a one-year lockup period in which your money is not accessible. Following this period, there’s a five-year holding period. Cashing in the bonds during this phase will initiate a three-month, interest-earned penalty. However, maintaining secured savings in a vehicle that will keep pace with inflation may be worth the limited liquidity offered by these bonds.
Whether the funds come from a windfall event or you create a plan to build your emergency savings over time, deciding where to keep your cash can add to your bottom line. Keep an eye on the rate of return offered by each account type, recognizing that variable rates can change. You also want to consider how easy it is to draw money from your account. Combining your savings among several different types of savings vehicles will provide the ability to capitalize on better rates with longer-term savings restrictions, while allowing you the flexibility to access cash quickly to cover unexpected expenses.