What Is the Best Account to Stash Your Cash?
- Maintaining a diversified portfolio also includes your approach to cash.
- Why? Cash amounts to 26% (or $60,000) of the average Personal Capital Dashboard user’s portfolio.*
- Consider a high-yield cash account that offers no minimums or fees, flexible transfers options, and higher returns on your cash savings. Cha-ching.
If you have a long-term investment strategy, then you understand the importance of making your money work for you.
But there’s space to save beyond your investment accounts. If you haven’t considered returns on your cash, read on to learn how to make the most of your emergency fund and cash for short-term goals.
Lazy Cash is a Big Problem
Cash amounts to 26%* of the average Personal Capital user’s portfolio. In dollars, that’s nearly $60,000 per person* – no small chunk of change.
|Age by Decade||Cash (median)||Percentage of Cash in Overall Portfolio|
|No age data||$53,644.59||38.65%|
Like many people, you may default to leaving extra funds in your traditional checking or savings account. Reasons vary. Maybe you haven’t decided how to allocate it to investment accounts. Perhaps you’re stowing away money for a rainy day. Or you could be building up savings for a short-term goal like funding a vacation or new car. All of these – particularly the latter two – are valid reasons to keep cash working for you.
However, if you have any significant amount of money sitting idle in a low-interest account, you’re actually losing money in two ways:
- Bank fees may cost more than you’re earning on your funds.
- Paltry interest rates paid by traditional banks often don’t keep up with historic inflation rates.
For those whose cash is stashed in a low-interest account, they’re losing out on maximizing the power of compounding interest. Compound interest is the money your bank pays you on your balance — known as interest — plus the interest on your interest over time.
In other words, your money can earn more money while it’s parked in one of the following accounts.
5 Account Types for Your Short-Term Savings
Here are some alternatives to low-yield checking and savings accounts.
1. High-Yield Cash Accounts
Typically, these accounts are associated with online institutions.
They provide several advantages beyond higher yields on your money – currently more than 2% return versus the 0.1% you may get with a traditional bank.
The advantages of high-yield accounts include:
- FDIC insurance (just like your traditional bank.)
- High liquidity (Some have withdrawal restrictions, but they aren’t generally overly restrictive.)
- Convenient features (Your money is readily available on a user-friendly platform.)
- No fees or minimums (Keep the money you earn.)
2. Money Market Accounts
This option is very similar to a high-yield account, including FDIC insurance. At many financial institutions, the differences between a money market account and a savings account are negligible. However, money market accounts are more likely to restrict the number of withdrawals per month, so you may want to explore those restrictions before choosing between the two options.
3. Certificates of Deposit (CDs)
While CDs are designed for short-term investors, they do carry withdrawal restrictions based on the length of CD you purchase. For example, a three-month CD will tie up your funds for a few months, while a five-year CD means you can’t touch the money for – you guessed it – five years. The longer the time period, generally the higher the yield. However, CDs work best only if you know your funds will not be needed during that period. If you need the money sooner, you’ll generally pay early withdrawal penalties, which takes a big bite out of your overall return.
4. Short-Term Bond Funds
These mutual funds invest in short-term bonds, both corporate and U.S. government bonds. These funds are less risky than their equity market-equals, although there is some inflation risk. The advantage of a bond fund versus a CD is flexibility. You can withdraw money from a short-term bond fund without penalties, so your money is not tied up for a specific period.
However, you will pay fund fees, which can eat into your return. Be sure to review the expense ratios of any short-term bond fund before you invest.
5. Money Market Funds
Unlike money market accounts, money market funds are mutual funds that invest in short-term U.S. government and corporate debt. They are not FDIC insured. And, theoretically, prices for these funds can fluctuate, but they nearly always maintain a stable price, so they are considered a safe investment for short-term money. While your money is readily available, these funds are not generally the savings vehicle of choice for consumers who want to regularly access their cash.
How Much Return Can You Expect?
Of course, return varies based on the short-term instrument you select, as well as the environment in which you’re shopping around. Rates are variable.
The best way to determine which vehicle is best for you is to consider these questions:
- How much access do I need to my money?
- How much do I need or want in FDIC insurance?
If you want flexible access to your money and the extra protection of FDIC insurance, we’d recommend starting with a high-yield or money market account. For most investors with extra money sitting in a traditional checking or savings account, these are the best options. These accounts tend to offer higher returns than traditional savings accounts, have few restrictions, are easy to open, and are FDIC insured.
There is a possibility of greater return from other options, such as CDs or short-term bond funds, but it’s also important to consider the restrictions that will be placed on your money and the lack of FDIC insurance with some of these options.
Ready to get started? Personal Capital Cash offers no account minimums, no fees, and flexible deposits and transfers. This account does more than just stash your cash; you can earn from it while having the flexibility to access it every day.
Get Started with Personal Capital Cash
*Anonymized Personal Capital Dashboard data as of August 2022