At a recent social gathering, I was introduced to a pediatric surgeon – a younger guy, probably in his early 30s. We got to chatting about what we do for a living, as strangers often do. After discovering that I was a personal finance writer, he offered the following admission and question: “I have a bunch of money just sitting in a bank account right now, earning 0% interest. I don’t really trust the stock market these days. What should I do with it?”.
Now, a pediatric surgeon may have more cash sitting around than most, but I’m sure he’s not alone with this sentiment. My guess is that there are millions of individuals out there right now that have the same hesitations about the market and for whatever reasons are opting to let their cash sit idly by, stuffed under a mattress (literally or figuratively) – unsure of where to put it. So, I wanted to dig in deeper to this challenge here.
Before we get in to some options, let’s recap what we know about the situation:
- Bunch of cash, earning 0% interest.
- Risk averse investor, not interested in the stock market.
At a broader level, as of this article’s publish date, we also know that:
- Inflation is roughly up 3.4% in the last year – so continuing to earn 0% will only erode the value of savings over time.
- Standard bank savings accounts are earning an average of 0.59% and checking accounts are earning 0.08% nationally – both far below 3.4% inflation and resulting in erosion of value over time.
The Case for for Stocks
There is a strong argument backed by historical data (~10% annualized returns over the last 100 years, far outpacing inflation) that suggests someone in their younger years should create an emergency fund (6-12 months worth of living expenses) and passively invest anything above and beyond that in an index fund or ETF that closely tracks the S&P 500 or another broad stock market index – and keep it there for the long haul. However, if an individual has short-term financial goals (e.g. purchasing a house) or wants to avoid risk, what are their alternatives?
Alternatives to Stocks & Low-Interest Cash Savings
Fortunately, due to high interest rates right now, there are currently some solid alternative options for stock-averse investors or investors looking for high liquidity that are far greater options than having cash sit idle in a near 0% APR deposit account.
Pay Off High-Interest Debt
- Summary: Paying off high-interest debt (I’d consider anything greater than 5% at the moment to be “high interest”) provides a guaranteed return equal to the APR owed. High-interest debt culprits typically include payday loans, credit card debt, mortgages, auto loans, and some student loans.
- Where to Find: Review all of your personal debts for current APR interest rates at the moment, and apply additional payments to pay down the principal.
- Pros: Guaranteed return that potentially is higher than you can find anywhere else.
- Cons: Reduces principal cash balance that can be used towards budgetary cash flow.
High-Yield Savings Accounts & Money Market Accounts:
- Summary: High-yield savings accounts and money market accounts are offered by banks and credit unions. Interest rates vary greatly, but some high-yield accounts offer 5%+ recently.
- Where to Find: Use an aggregator site like bankrate.com to find the best rates/terms and purchase directly from an insured bank or credit union.
- Pros: FDIC/NCUA insured, close to zero risk.
- Cons: Rates can change at any time. Higher rate accounts typically have minimum/maximum balance amounts. It’s rare to find a high-yield account that offers 5%+ on balances over $20,000. There may also be limitations on the number of transactions and/or withdrawals that can be made within these accounts (more of an issue with high-yield savings than money market accounts), so liquidity can be a challenge.
Money Market Funds:
- Summary: money market funds invest in short-term cash equivalents (U.S. Treasuries, high-quality debt, cash-like equivalents). Money market funds are different than money market accounts and are not offered by banks. Interest rates have commonly been 5%+ recently.
- Where to Find: Within brokerage accounts.
- Pros: low-risk, high liquidity in that there are no limitations on transfers/withdrawals, and some offer state tax exemptions.
- Cons: balances are not insured against loss (losses are unlikely). Note: “prime” money market funds tend to have higher risk than money market funds focused on government debt.
CDs with Early Withdrawal Penalties:
- Summary: A CD (certificate of deposit) offers a guaranteed rate of return on a deposit for a specified period of time. CDs with withdrawal penalties offer higher rates for a guaranteed return and length of time at the expense of liquidity (punitive early withdrawal penalties). They can be purchased at banks or credit unions.
- Where to Find: Use an aggregator site like bankrate.com to find the best rates/terms and purchase directly from an insured bank or credit union.
- Pros: FDIC/NCUA insured, close to zero risk, guaranteed rates for length of term.
- Cons: low liquidity.
CDs without Early Withdrawal Penalties (“No Penalty CDs”):
- Summary: CDs without early withdrawal penalties are rare and typically come with the downside of lower interest rates than the other options on this list.
- Where to Find: Use an aggregator site like bankrate.com to find the best rates/terms and purchase directly from an insured bank or credit union.
- Pros: FDIC/NCUA insured, low-risk, rates locked in at longer terms than non-CD bank accounts, which can change at any time.
- Cons: Lower rates than alternatives.
Brokered CDs (in Brokerage Accounts):
- Summary: Brokered CDs are CDs that can easily be purchased within online brokerage accounts – hence the “brokered” name. There are 2 types: “callable”, and “non-callable”. With callable brokered CDs, rates are typically a little higher that non-callable, but the issuer can terminate (“call back”) the CD before its maturity date. I have avoided callable CDs for this reason.
- Where to Find: Within brokerage accounts.
- Pros: FDIC/NCUA-insured, low-risk, can be sold at market rates at any time without early withdrawal penalty.
- Cons: If sold prior to length-of term, brokered CDs are sold at market rates and the value can increase/decrease. “Callable” CDs can terminated at any time by the issuer, which is common if rates decline.
U.S. Savings I Bonds:
- Summary: U.S. I savings bonds can be purchased directly at treasurydirect.gov and offer a fixed rate for the life of the bond in addition to a variable rate that changes every 6 months and closely tracks inflation (for better or worse). I’ve detailed how to buy I bonds and how to sell I bonds in depth.
- Where to Find: The treasurydirect.gov website.
- Pros: Fully backed by the U.S. government, exempt from state and local tax.
- Cons: The current I bond rate is below alternatives on this list. I bonds must be held for a minimum of 1 year and if you cash in the bond in less than 5 years, you lose the last 3 months of interest.
U.S. Treasuries (in Brokerage Accounts):
- Summary: U.S. Treasuries (bills, notes, and bonds) are essentially loans from you to the U.S. Government, that are returned with interest payments to you.
- Where to Find: Within brokerage accounts.
- Pros: Fully backed by the U.S. government, exempt from state and local tax, rates are locked in when held for full-length of term, but can be sold at market rates any time without an early withdrawal penalty.
- Cons: If sold prior to length-of term, they are sold at market rates and the value may have decreased.
Those are some of the lower-risk alternatives to stocks that are currently beating the inflation rate at the moment. With these options, there really is no legitimate excuse to have cash sit idle earning at or close to 0%.
As with any investment, it’s important to understand the risks involved before investing – so do your research and speak with a professional, if you are uncertain.