Short-Term Savings: Optimal Places to Keep Your Cash

For a short-term savings alternative, where should you turn?

If you have a long-term investment strategy, then you understand the importance of making your money work for you. But do you apply that same approach to smaller sums of money that could be working for you over the short-term? You may not think about this when it comes to your savings — your emergency fund or your cash stashed away for short-term goals, but you could be missing out on the opportunity to make that money work for you too.

Lazy Cash is a Big Problem

Today’s low-interest-rate environment practically encourages ignoring the value of your short-term cash. Traditional savings accounts have offered interest rates near zero since the 2008 financial crisis. It’s no wonder consumers spend little time focusing on managing short-term funds.

Unfortunately, this inertia is costing big money. At Personal Capital, our two million dashboard users have over $41 billion in cash sitting in savings, checking, or money market accounts. We estimate that these consumers may be losing approximately $900 million annually simply because they aren’t parking their short-term cash in the most advantageous spot*.

If your money is sitting in your checking account or a traditional bank savings account, you’re among those who could benefit from making a change!

Read More: Make Every Penny Count

There are Some Easy Solutions

Many people leave extra funds in their traditional checking or savings account because it’s just a default solution. All of us are or have been guilty of just letting money sit in our bank accounts at one time or another. If you have any significant amount of cash sitting in your low-interest checking or saving account, you’re losing money in two ways: 1. Bank fees may cost more than you’re earning on your funds. 2. Paltry interest rates paid by traditional banks don’t always keep pace with inflation.

So, needless to say, it might be good to explore other options for any short-term cash that isn’t invested in the markets or your emergency fund.

5 Higher-Yield Account Types for Your Short-Term Savings

Here are some alternatives to traditional, low-yield savings accounts.

High-yield Accounts

Typically, these accounts are associated with online institutions. They provide several advantages beyond higher yields on your money—typically more than 2% return versus way below 1% from traditional banks. The advantages of high-yield accounts include FDIC insurance (just like your traditional bank), high liquidity (some have withdrawal restrictions, but they are not overly restrictive) and convenience (your money is readily available).

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.

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 3-month CD will tie up your funds for three months, while a five-year CD means you can’t touch the money for five years. The longer the time period, 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.

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.

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 and when you are shopping (rates are subject to variability, but in the current environment that fluctuation is minimal). The best way to determine which vehicle is best for you is to answer these questions:

1. How much access do I need to my money?
2. 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. They 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.