Lester Freeman
There are many options for storing money that is to be used for investing, each with its own advantages and disadvantages. Here are some of the most common options:
- High-yield savings accounts: These accounts offer higher interest rates than traditional savings accounts, making them a good option for those seeking higher returns. They are also easily accessible, allowing quick transfers to your primary bank or withdrawals via ATM. However, they usually have a limited number of fee-free withdrawals or transfers per statement cycle.
- Cash management accounts: These accounts provide a high level of liquidity, allowing you to access your money quickly. They may also pay interest on your holdings. Cash management accounts are often invested in low-yield money market funds, offering safety and relatively low risk.
- Money market accounts: These bank deposits typically offer higher interest rates than regular savings accounts but usually require a higher minimum investment. They provide liquidity and are insured by the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA), ensuring the safety of your funds.
- Certificates of Deposit (CDs): CDs offer higher interest rates than savings accounts and provide a fixed interest rate for a defined period. They are ideal for those who want to lock in a fixed rate during a period of falling interest rates. However, withdrawing money from a CD early typically incurs a penalty.
- Short-term corporate bond funds: These funds invest in bonds issued by corporations and are suitable for those seeking a diversified portfolio of bonds. They offer the potential for higher returns than government bond funds but carry more risk as they are not insured by the government.
- Short-term U.S. government bond funds: These funds invest in low-risk government bonds, which are backed by the full faith and credit of the U.S. government. They provide stable and reliable returns but tend to offer lower interest rates compared to corporate bonds.
- Money market mutual funds: These funds invest in short-term securities and provide daily liquidity. While they are generally safe, they are not insured like money market accounts, and there is a slight risk of losing money during severe market distress.
- Treasury bills: T-bills are backed by the government, making them a risk-free investment. They offer various maturity dates, from four weeks to 52 weeks, providing flexibility. T-bills can be purchased directly from the government or through a brokerage firm, and they have a minimum investment of $100.
| Characteristics | Values |
|---|---|
| Accessibility | High liquidity, easy withdrawal |
| Safety | FDIC-insured, low risk, stable |
| Returns | High interest rates, high yield |
| Requirements | Minimum balance, minimum investment amount |
| Flexibility | Check-writing privileges |
What You'll Learn
High-yield savings accounts
- Pibank – 5.50% APY
- TotalBank – 5.01% APY
- Openbank – 5.00% APY
- Fitness Bank – 5.00% APY
- Ivy Bank – 5.00% APY
- Bank5Connect – 4.95% APY
- Newtek Bank – 4.90% APY
- Vio Bank – 4.90% APY
- BrioDirect – 4.85% APY
- Jenius Bank – 4.80% APY
- Valley Direct – 4.80% APY
- EverBank – 4.75% APY
- Primis Bank - 4.75% APY
- My Banking Direct – 4.75% APY
- Poppy Bank – 4.75% APY
These accounts offer a range of features, such as no minimum balance requirements, no monthly fees, and easy access to your money.
When choosing a high-yield savings account, it is important to consider the annual percentage yield (APY), minimum opening deposit and balance requirements, monthly fees, and ease of access to your money. It is also essential to ensure that the bank is FDIC-insured or NCUA-insured to protect your deposits.
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Money market accounts
When choosing a money market account, it is important to compare rates, fees, deposit and balance requirements, and additional benefits such as debit cards and check-writing privileges. While money market accounts offer higher interest rates than savings accounts, they also have monthly transaction limits, typically allowing only six transfers or withdrawals per month. This limit was imposed by Regulation D but was suspended in April 2020 by the Federal Reserve to make it easier for consumers to access their savings during the COVID-19 crisis.
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Short-term government bond funds
When considering short-term government bond funds, it is essential to evaluate their expense ratios or fees. Lower expense ratios are generally preferable as they maximise your returns over time. Additionally, short-term government bond funds are well-suited for investors saving towards short-term financial goals. They offer a decent rate of return without exposing you to excessive risk.
- Vanguard Short-Term Treasury ETF (VSBSX)
- SPDR Portfolio Short Term Treasury ETF (SPTS)
- Schwab Short-Term US Treasury ETF (SCHO)
- Vanguard Short-Term Corporate Bond Index/ETF (VSTBX)
- PGIM Short-Term Corporate Bond (PSTQX)
These funds are managed by reputable companies such as Vanguard, SPDR, Schwab, and PGIM, offering low expense ratios and effective duration management. Remember to conduct your own research and consult a financial advisor before making any investment decisions.
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Cash management accounts
CMAs are not a banking product, and the money deposited in them is not directly held or managed by the CMA provider. Instead, the funds are "swept" into accounts at partner banks, where they earn interest and receive FDIC insurance protection. This means that the funds are only FDIC-insured once they are in the partner bank accounts, and not while they are with the CMA provider or in transit. Some CMAs may also offer SIPC insurance for additional protection.
The best CMAs offer high interest rates, low or no fees, and robust features. Examples of CMAs include the Wealthfront Cash Account, Betterment Cash Reserve, Empower Personal Cash, Fidelity Cash Management Account, and Vanguard Cash Plus Account. These accounts offer competitive interest rates, no minimum balance requirements, and features such as ATM fee reimbursement, check writing, and mobile apps for budgeting.
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No-penalty certificates of deposit
No-penalty CDs usually have terms of around one year, and you can typically withdraw the full balance at any time starting the week after you fund the CD. However, partial withdrawals are generally not allowed, so if you withdraw early, you will need to take out the entire balance and close the account.
No-penalty CDs are insured by the Federal Deposit Insurance Corporation (FDIC) at banks for up to $250,000 per depositor, per bank, and per account ownership category. The National Credit Union Administration (NCUA) insures CDs for up to the same amount at federal credit unions and most state-chartered credit unions.
No-penalty CDs can be a good option for those who want the flexibility to access their money without penalties, but there are some drawbacks. While they offer a competitive annual percentage yield (APY) that is typically higher than savings accounts, the APY is usually lower than that of traditional CDs. Additionally, no-penalty CDs often have minimum deposit requirements, and the term lengths available may be limited.
- USAlliance Federal Credit Union: 4.80% APY, $500 minimum deposit
- Ally Bank: 4.00% APY, $0 minimum deposit
- Marcus by Goldman Sachs: 3.90% APY, $500 minimum deposit
- Bank of America: 3.51% APY, $1,000 minimum deposit
- CIT Bank: 3.50% APY, $1,000 minimum deposit
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Frequently asked questions
If you want to keep your money in a place where you can access it quickly, a high-yield savings account or money market fund are good options. These accounts offer high liquidity, meaning you can withdraw your money whenever you need it. They also tend to be lower-risk investments, so you may not have to worry about losing money. However, the trade-off is that they usually offer lower yields than other investment options.
If you want your money to be guaranteed, look for investment options that are insured or backed by the government. For example, the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 in savings accounts and certificates of deposit (CDs) offered by banks. Similarly, the National Credit Union Administration (NCUA) provides insurance for credit union accounts. Government bonds are also considered very safe because they are backed by the full faith and credit of the government.
Some low-risk investment options include high-yield savings accounts, money market accounts, short-term corporate bond funds, government bonds, and CDs. These options typically offer lower yields than riskier investments but provide a greater level of stability and security for your money.
If you're willing to take on more risk, you can consider investing in stocks, mutual funds, exchange-traded funds (ETFs), or corporate bonds. These options offer the potential for higher returns but also come with a greater level of volatility and risk. It's important to carefully consider your investment goals, risk tolerance, and time horizon before choosing these higher-risk options.
