It’s time to give yourself a ten-second financial check-up: Are all of your hard-earned dollars earning interest? Even your short-term savings that you’ll need in two years or so?
Savvy investors know that every dollar deposited at a bank, brokerage, or financial institution should be making money—and that includes your short-term savings, cash investment balances, even your checking account. If not, you should be looking for somewhere else to store your dollars.
Let’s look at where to find places to stash your short-term savings and, also, how to determine how much risk to take-on when saving or investing cash you’ll need in the short-run.
The obvious choice: An online savings account
Finding an FDIC-insured online savings account is easier than ever. These accounts pay up to 5x the national average savings rate and are convenient to open and manage. You can transfer money in and out electronically from your checking account or other bank accounts—a process that rarely takes more than two business days. Most online savings accounts have no fees or minimum balance requirements, so there’s no excuse for not using one for short-term cash reserves.
The Discover Online Savings Account is a good example of an online bank with a competitive rate and no minimum balance requirement. You can read our Discover Savings review here or browse today’s best online savings rates.
Consider an interest-bearing checking account
Although not as common as high-yield savings accounts, interest-bearing checking accounts do exist if you’re willing to change your everyday checking relationship. (It’s a bit of paperwork, but not as difficult as it may seem.)
If you only keep a couple thousand dollars or less in your checking account at any given time, the interest you’d earn from an interest-bearing checking account might not be worth it. The larger your average checking balance, however, the more it might sense to switch. Even a $5,000 average daily balance would earn $50 a year at 1.00 percent APY.
Most commercial banks either don’t pay interest on checking accounts or require huge minimums to pay a paltry interest rate. If you want to earn interest (or at least interest that matters) on your checking account, you may again have take a look at online banks.
Perhaps the best option right now is the Discover Cashback Debit account. While it doesn’t offer interest, you can earn 1% cash back on up to $3,000 in debit card purchases each month. And I really like that there are no monthly fees or minimum balances required and the fact that there are over 60,000 ATMs nationwide. And standard checks are free too!
What about certificates of deposit?
Savers that are looking for the best return on their money on a long-term basis should take a look at a certificate of deposit. CD’s have terms that typically run from a period of 3 months to 5 years. Rates will increase as the CD term gets longer.
You can get the best rate on a CDs by shopping online, as these change quite often. Most CDs will have minimum deposits of $500 or more, and patient investors can get a higher rate on a longer term CD. You can browse today’s best CD rates here.
Plus check out this article on an interesting investing method called CD laddering, and find out how to build your own.
Should you invest your short-term savings?
When you save money in an FDIC-insured bank account, your money is guaranteed not to lose value. When you invest money, you’re taking on risk for the chance at a greater return. You might very well earn a much better return on your money than you could with a bank, but you could also end up with less money than you put in.
In general, you want to save money you’ll need in the short-term and invest money you won’t need for a long, long time. That’s because the risk of losing money on an investment diminishes the longer you’re able to hold that investment. We all know the stock market is volatile. If you put your money in the day before a crash, you could lose a big chunk of value over night. If you leave that money invested for 30 years, however, you’ll likely come out way ahead (despite the initial crash!)
Risk tolerance is a personal thing, but my philosophy is that I never invest money I’ll need in the next two years. If don’t need the money in the next two years but will need it in the next five years (for example, money I’m saving for a future car purchase), I might invest the money, but very conservatively.
If you’re looking for a simple way to automatically save money for a short-term goal, but you’d rather take your chances investing it rather than parking it at a bank, check out an app called Acorns. You just download the app, link a bank account, answer a few questions, and you’re an investor. You can connect the app to any number of debit or credit cards and Acorns automatically “rounds up” each of your purchases and invests that amount on your behalf. While this won’t make you rich, it can help any first time investor make a little extra cash.
If you’ll be investing larger sums or for the long-run, be sure to read more about the best robo-advisors and investment accounts for new investors to help you make the right choice.
For most people, the best place to but short-term savings is an online savings account that pays a fair interest rate given the current rate environment. If you keep a larger checking balance, you might also want to consider moving your relationship to an interest-bearing checking account.
Certificates of deposit still have their place for risk-averse savers who can park their cash for a year or longer. Finally, investing money you’ll need within two-to-five years is risky, but there are plenty of robo-advisors that will make investing for any goal quite easy.