As we move from a debt-based society to a savings-based society, one question reverberates over and over again. Now that I have some money, where should I put it? Your parents will probably tell you to sock it away into a traditional interest bearing savings account, while your grandparents will tell you that the safest place for your cash is under your mattress or in the back yard in Mason jars. While both methods of saving are pretty safe, meaning that it’s highly unlikely that you will lose that money (unless you forget where you buried it!), neither one offers much in the way of growing your cash.
The main problem with most savings products is that they either offer very little in the way of earning interest, or are highly restrictive when it comes to making deposits or withdrawing your money. I’m not even sure if I should address the drawbacks of having cash stashed around your house or under your grass, although I do have a great anecdote about a great uncle of mine who thought that there was a “wealth” of knowledge in his extensive library of electronics textbooks. Little did we know that he meant “wealth” in the literal sense of the word. We removed over $25,000 from his home in the weeks after he passed away after we found the first envelope of cash in one of those darn textbooks!
So, what do you do with that little nest egg that you have so diligently saved up? Depends on what type of risk you are willing to make with your money. Simply put, the higher the potential return, the more risk you have to take on with your initial investment. The good news is that there are several options for saving your money that will earn you a better return than a regular interest bearing savings account minus the risk of losing it all.
Online Savings Accounts
With online savings accounts, not only does your money remain easily accessible, but it earns a higher interest rate than traditional savings accounts. For instance, let’s say your brick and mortar bank offers a savings account with 1% interest. A comparable high interest online savings account, say with Ally Bank, will net you a higher yield and a decent increase in potential earnings. This is due to the lower costs you’ll find associated with many online banks. Your money is also insured against loss by the FDIC. What more could you ask for?
Certificates of Deposit
CDs or time deposits have been around for a long, long time and offer customers the ability to save money at a much higher rate than any savings account product. The major drawbacks to CDs is that most have a minimum balance criteria that has to be met before it can be opened and withdrawing your money before the maturity date will result in hefty penalties. Everbank’s online bank has many great CD options.
Government Issued Bonds
Bonds have also been around for nearly forever and offer you a safe place to put your money. You can invest in either short term bonds, long term bonds, or both. The biggest benefit to buying short term bonds is that, like online accounts, the interest rate is around 5%. Longer term bonds have better interest rates, but keep your money tied up for a significant amount of time (10 years or more) before you can reap the benefits. They are also guaranteed against loss.
Money Market Mutual Funds
For those of you who, like me, are a little behind the times when talking about investing, a money market mutual fund may not seem like the best idea. But here’s why this one might be the best choice of all, for your cash investments. While a money market mutual fund is a type of mutual fund, it’s still one of the safest investments you can make as they are considered “cash” accounts. Money market mutual funds differ from regular mutual funds in that they are invested in relatively more conservative instruments and are considered quite stable. The money you invest will remain fairly liquid, making withdrawals fairly easy (at least easier than long term bonds and CDs).
Saving money is one of the most important things you can do to secure your financial future. Deciding where to put your money is another. Evaluate your needs and determine which option is right for you. In many cases, it makes a lot of sense to spread your savings around among options that keep your money readily available and among those that prevent you from making early withdrawals.
