A common question I receive is where to put savings for short-term goals like an emergency fund or the down payment on a home you’re planning to purchase in the next few years. First, you probably don’t want to put it in anything risky like stocks, real estate, commodities, cryptocurrency, or even many types of bonds. That’s because their value could be down when you need the money. At best, you’ll be forced to sell at a loss and at worse, you might no longer have enough for your goal.
Where to Stash Your Cash
Rewards Checking Account
- Pro: Believe it or not, these checking accounts can pay more interest than anything else I’ve seen these days. The highest paying account on DepositAccounts is currently yielding over 5%! Many also reimburse ATM fees.
- Con: They only pay those interest rates on a limited amount of money (the one above is limited to $10k) and you have to jump through several hoops like using direct deposit, electronic statements, and even using your debit card and/or the website a minimum number of times in a month. Many of these may also not be local to you so you would have to bank remotely.
Online Savings Account
- Pro: They tend to pay more than brick-and-mortar banks but unlike the reward checking accounts, they require very little effort. In fact, you can typically link them to your current checking account.
- Con: Some only pay the rate on a limited balance.
Certificates of Deposit (CD)
- Pro: These generally pay a higher interest rate than savings accounts.
- Con: You generally can’t add to a CD (you typically have to purchase new ones each time) and you lose some of the interest if you cash it in before it matures.
I-Bonds
- Pro: These savings bonds are guaranteed by the federal government, don’t fluctuate in price (although the interest rate fluctuates with inflation), are state tax-free, can be federal tax-deferred, and are currently paying a little over 2.5%. The interest can also be tax-free for education expenses if you meet the qualifications.
- Con: You can only purchase up to $15k per year and you can’t cash them in the first 12 months. If you cash them in the first 5 years, you lose the last 3 months of interest, so these are best for goals that are at least a year out, ideally more than 5 years.
Life Insurance Cash Value
- Pro: These can provide the highest interest rates and you can borrow from it tax-free.
- Con: Purchasing a new policy can be very expensive and the fees and insurance costs can outweigh the benefits of the cash value.
There is no one best place to stash your cash. It all depends on your situation and what you value. If you’re not sure which option makes the most sense for you, consider consulting with an unbiased financial planner. Your employer may even offer free access to them as part of a workforce financial wellness benefit. If so, take advantage of it since no fees means more cash in your stash.