You’ve come into extra money and need somewhere safe to put it. First, think about when (if) you’ll need it. For example, is it for a down payment on a house or car? Is it money to pay for a major home repair or is it unexpected money you don’t need right now?
Knowing your timeline will help you decide where to save and/or invest the funds.
A high-yield savings account offers liquidity. You can access the funds whenever you want (maximum 6 withdrawals per month).
HYSA often pay higher interest rates than a savings account at your local bank. With the Fed lowering rates to 0%, though, the interest rates during the pandemic haven’t been much to talk about.
But, some interest is better than none and high-yield savings accounts pay more than the minimal interest you’d earn at your local bank.
A money market account is a cross between a savings and checking account. You get higher interest rates like a high-yield savings account, but the check writing privileges of a checking account.
Like a high-yield savings account, you may only make up to 6 withdrawals per month. If you withdraw more, you’ll pay an excessive withdrawal penalty. Money market accounts usually pay higher interest rates than HYSA but have higher minimum balance requirements too.
If you can put your money away for a specified period, you may earn more on a CD. The longer the term you choose, the more interest you’ll earn. CDs range from 3 months to 10 years. Choose a term you know you can leave the funds untouched, though.
If you withdraw the funds early, you’ll pay a penalty, which is often 60 – 150 days’ worth of interest.
If you can part with the money for 5 years, consider a short-term bond. While this is more of an investment than a savings vehicle, you’ll earn interest on your investment.
A bond is essentially a loan to the government or corporation (government bonds are the least risky). They pay you interest to borrow the funds. Upon maturity, you cash in the bond and receive your principal and earned interest.
If you want an even riskier (yet more rewarding) investment, consider an ETF. This basket of diversified securities invests in a variety of investments. They are a cross between a mutual fund (diversified investments) and stocks because you can trade them on the market during regular trading hours.
EFTs track a specified index and pay investors prorated dividends which you can take or reinvest for a larger investment.
You can cash in your ETF investment at any time, but are subject to the market value at that time, which could mean a gain or a loss.
Choose your savings or investment vehicle wisely, paying close attention to your timeline. Withdrawing funds earlier than the investment allows could cost you money, which would defeat the purpose of saving or investing your funds.