Where To Stash Your Cash

We’ve written a number of times now on the importance of having an emergency fund with three to six months’ worth of expenses in an easy-to-access account. You might also have some cash on hand that you’re not ready to spend or invest yet, in which case you might want to consider an account with more yield even if it’s not easy to access the cash.

There are a variety of factors to consider when deciding where to stash your cash while building and holding onto your savings. Let’s take a look at the pros and cons of a few different types of accounts.

  1. Savings Account

This is the tried-and-true account for short-term savings. These accounts are generally pretty easy to access, and easy to open and start. However, it’s unlikely that your cash will be able to keep up with inflation based on the interest that most banks pay. You can shop around and compare different interest rates to find a bank that fits your needs.

Pros:

  • The money is insured by the FDIC
  • Account minimums are oftentimes low

Con:

  • Most banks these days only offer minimal interest rates
  1. Money Market Account

A money market account is very similar to a savings account. Your deposit is insured by the FDIC and also fairly liquid. These accounts are different from savings accounts, though, because banks typically invest this money in safe, short-term investments. The interest rate you then receive on your money is based on the investment’s yield, but some level of interest is guaranteed.

Be careful, these accounts are often confused with money market funds which are an investment in the debt of governments and major corporations. These accounts can lose money based on the market and they’re not as liquid as money market accounts.

Pros:

  • The money is insured by the FDIC
  • Potentially (and typically) a higher yield than most savings accounts
  • An equal liquidity to savings accounts

Con:

  • They tend to have higher minimum balances
  1. Certificates of Deposits (CDs)

These have not been very popular in recent years due to their low-interest rates. With the Fed now starting to raise interest rates again, though, we might start to hear more about them. Certificates of Deposits (CDs) are accounts offered by banks and credit unions that typically have higher yields than savings accounts, but account holders generally pay a penalty when they withdraw money from a CD before it matures depending on the type of CD they own.

CDs are offered in terms of a set period of time which are typically anywhere between three months to five years with the interest on the CD based on the amount of time the money is held. These are generally not liquid accounts, so most likely they’re not the best choice for your emergency savings.

Pros:

  • The money is insured by the FDIC
  • Typically higher interest rates than a savings account

Con:

  • You can’t access your cash until the CD matures without paying a penalty
  1. U.S. Government Bills and Notes

Ask not what your country can loan to you, but what you can loan to your country. U.S. Treasuries are backed the by government, and considered one of the safest investments in the world. Treasury bills mature in less than a year while a Treasury note matures between two to 10 years. Clearly, these are illiquid places to keep your cash, so don’t stash your emergency savings in one.

Pros:

  • Backed by the U.S. government
  • Can be bought directly, commission-free, at treasurydirect.gov
  • They’re exempt from state and local taxes

Con:

  • You can’t access your cash until the Treasury has matured without a penalty

So, where will you stash your cash?