7 places to save your extra money
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Whether you’ve earned a bonus at work or made a profit selling your house, having extra money gives you a chance to grow your savings and reach financial goals. Deciding on the best place to stash your cash isn’t always easy, however, and can depend on your individual circumstances.
Return on investment is an important factor to consider, as well as liquidity and how soon you might need access to the cash. Safety and investment costs should also be considered when determining where you should save extra money.
With that in mind, here are some options to consider.
1. High-yield savings account
A high-yield savings account is a viable option for growing your savings and providing easy access to the money for emergencies or other unplanned expenses.
To put the earnings into perspective, the yields on traditional savings accounts are typically very low, as little as 0.01 percent annual percentage yield (APY). On the other hand, the top high-yield savings accounts currently earn over 5 percent APY.
You can open a savings account to build an emergency fund or save for a vacation or home repair while having safety and liquidity.
If you need to access portions of your money from time to time, keep in mind savings account restrictions might be a problem. There could be a limit of six withdrawals or transfers per month, depending on the bank’s policies.
It’s important to have a savings account with a bank that’s insured by the Federal Deposit Insurance Corp. (FDIC). This way, you won’t lose your funds should the bank fail. The FDIC insures up to $250,000 per depositor, per FDIC-insured bank, per ownership category. Many credit unions are similarly insured by the National Credit Union Share Insurance Fund (NCUSIF).
2. Certificate of deposit (CD)
Like a savings account, a certificate of deposit (CD) is often a safe place to keep your money. One big difference between a savings account and a CD is that a CD typically locks up your money for a set term. If you withdraw the cash early, you’ll be charged a penalty.
CDs usually carry fixed yields, so tying up your funds in a CD can be a bad idea in a rising rate environment. Conversely, locking in your money can be a smart move during a time when rates are falling.
CD terms commonly range between three months and five years, although shorter and longer ones can be found. Common types of CDs include:
- Traditional CD: This is the most common variety of CD, and it pays a fixed yield throughout its entire term. Taking out the funds before the term ends results in an early withdrawal penalty.
- No-penalty CD: Also known as a liquid CD, this account allows you to withdraw the funds early, although no-penalty CDs usually pay lower yields than traditional CDs.
- Bump-up CD: This CD typically allows you to request one rate bump throughout the term, if rates on CDs have improved.
One strategy to grow your earnings is to open several CDs that mature at different times. This is called CD laddering, and it provides flexibility and less risk than simply putting all of your money into a single CD.
3. Money market account
If you want a safe place to park extra cash that often earns a higher yield than a traditional savings account, consider a money market account. Money market accounts are like savings accounts, but they typically pay more interest and may offer a limited number of checks and debit card transactions per month.
A money market account can be a safe place to park extra cash and earn a higher yield than from a traditional savings account. Money market accounts are like savings accounts, but they often pay more interest and may offer a limited number of checks and debit card transactions per month.
Money market accounts offer easy access to your money, and they’re safe if your banking institution is federally insured. Some money market accounts offer a tiered structure that pays higher APYs for bigger balances.
A money market account can be a good alternative if you don’t want to tie your funds up in a CD for a long time. There are usually minimum deposit requirements for opening a money market account or for avoiding monthly maintenance fees.
4. Checking account
A checking account at a federally insured bank or credit union is a safe spot for money that’s earmarked for bills and everyday spending. It’s not necessarily the best place to save your money, however, since most earn little or no interest.
Checking accounts are highly liquid and come with check-writing privileges, ATM access and debit cards. Withdrawals can be made at any time, and there’s no risk to your principal.
Although it’s not common, there are checking accounts that offer decent yields. These accounts typically shouldn’t be your main place for storing savings, however.
Checking account fees are often nominal or waived if you maintain a minimum balance, set up direct deposit or use your debit card a certain number of times each month.
5. Treasury bills
Most checking and savings accounts, CDs and money market accounts offer federal deposit insurance, which is an important benefit.
But suppose you have cash stored up that exceeds federal insurance limits. In that case, you might want to look at U.S. Treasury bills, or T-bills, which are federal, short-term debt obligations with a maturity of one year or less. The longer the maturity, the more interest the investor earns.
T-bills also have the advantage of being liquid and easy to buy and sell. Plus, they’re extremely safe with no risk of losing principal, since they are debt that’s owned by the U.S. government.
T-bills are sold on the secondary market, such as through a broker or investment bank, or at auction on the TreasuryDirect site. They’re sold to investors for less than face value.
6. Short-term bonds
If you’re planning to park your cash somewhere for at least five years, consider options that are more like investments than savings accounts. An investment might generate a higher return, but all investments come with the risk that you could lose some or all of your money.
Unlike Treasury bills, short-term bonds don’t protect the principal. You could find that when you withdraw your money, you not only haven’t gained interest, but you’ve also lost some of the principal.
For example, a mutual fund that invests in short-term bonds might grow a little bit, but if interest rates rise, the value of the fund is likely to decrease. That’s because bond prices typically fall when interest rates rise. The longer the duration of a bond, the more vulnerable it is to rate fluctuations. That’s why some investors prefer short-term bonds.
7. Riskier options: Stocks, real estate and gold
Some people have a high risk tolerance, while others are only comfortable with safe investments, especially if they are retired or close to retirement.
Stocks, for example, can lead to high returns, though investors will need to bear the inevitable ups and downs of the market. A good place to get started is with an S&P 500 index fund, which includes the largest, globally diversified American companies across every industry. This tends to make it less risky than other investing options and has returned about 10 percent annually over time to investors.
If you’re looking to make a long-term investment, you may want to look into buying a home as a rental property. Finding and securing a suitable property could be difficult, however, due to rising mortgage rates, high inflation and a housing supply shortage.
Another popular investment option is gold, especially during tough economic times. Some investors see gold as a safe place to park their money, while others are more skeptical. Nonetheless, the decision to invest in gold should be a personal one.
How a financial planner can help you save extra money
When deciding where to put your extra money, consider seeking expert advice from a financial advisor, who can help you set up an overall financial plan.
A financial advisor can help answer questions regarding complicated topics like estate planning. Such specialized financial topics can be hard to navigate, and there’s no shame in getting a second opinion and some guidance.
Do some research before choosing a financial advisor who is a good fit for you and your situation. First and foremost, always make sure that your financial advisor is a real fiduciary who is acting in your best interest.
Focusing on a solid financial plan makes it easier to decide which saving strategies work best for you.
— Former Bankrate writers Libby Wells and Liz Hund contributed to previous versions of this story.
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The best places to save your money: Money market accounts, savings accounts and CDs