One of the personal finance questions that I most frequently get asked is: “where should I invest short-term savings?”.
When I dig deeper, I often find that the context behind the question is that the person asking has a short-term goal that they are saving up for (i.e. grad school, down payment on a home, wedding, vehicle, etc.), and they don’t want their savings to sit and decay, without earning a return on investment.
Because the funds will serve a specific purpose at a specific time, the goal here should be to preserve principal, while maximizing return, without risk. What type of financial account is best for that?
There is not an indefinite right answer to this question, as the answer can change over time based on various economic factors, but as of the time of publish, there are a few things that everyone should consider when deciding where to park short-term funds.
For Critical Savings, Avoid Volatile Investments Like Stocks & Bonds
If you have a critical goal amount that you need to get to (and maintain) in order to make your future purchase, you should avoid volatile securities like stocks and bonds. There is nothing worse than saving up for a big purchase, only to have the market crash right before meeting your goal. It’s just not worth the risk, when there is no guarantee that your investment will go up in value. You’ll sleep easier at night with your funds elsewhere.
Cash, Savings Accounts, Checking Accounts, and MMAs Don’t Currently Carry Much Punch
Savings accounts, checking accounts, and money market accounts (MMAs) are simple to use, highly liquid, and are typically FDIC/NCUA insured up to $250,000, all of which has historically made them a great vehicle for short-term investments.
However, at the time of publish, the national average rate for savings accounts is 0.09% for savings accounts, 0.08% for checking accounts, and 0.2% for MMAs. Those are near historical lows – and, sadly, it’s been this way for many years.
The federal government pegs its measure of inflation (CPI) around 2.5% for the past year. At that rate, and current savings/checking account rates, you’d be losing about 2.3 to 2.4% of your purchasing power for each year you have your funds sitting in one of those accounts. And if you want to put cash under your mattress, you’re losing the full 2.5%.
Some “high-yield” accounts are offering north of 2% rates, but they often make you jump through more than a few hoops, such as a certain number of transactions per month, high minimum balances, direct deposit, etc.
Certificates of Deposit Are Not a Solid Option Right Now
Certificates of deposit (CDs), have seen their rates drop in recent years and are not looking like a solid option for short-term investments right now.
CDs are not as liquid as savings/checking/MMAs, as most CDs will enforce an early withdrawal penalty if you withdraw funds prior to the full maturity of the deposit term. So you’ll want to be sure that you won’t need the funds prior, or you could lose money.
I’d recommend checking out the rates currently offered by your investment broker to see what time frame makes the most sense, and what the going rates are.
At current rates, and with rates expected to increase more in the near future, it looks like a CDs in the 3-month to 1-year range would make the most sense. You don’t get a huge premium for going longer. And there is almost no premium difference between the 5, 7, and 10-year CDs.
As always, shop around.
Look at Series I Savings Bonds
I Bonds have recently seen an interest rate increase as their returns adjust to current rates of inflation. They are a little less liquid than any of the other options highlighted here, as you must hold them for a minimum of 1 year. Any held less than 5 years will need to forfeit the last 3 months of interest.
Where are you currently parking your short-term investments? And why?
I currently park short term savings with online bank Sallie Mae which currently has a 2.2% rate of return on its money market account. There is no minumum balance and no monthly maintenance fees, and I can easily transfer money out of Sallie Mae to my regular bank. Check writing is also available, and transfers are free, but there ia a maximum of six withdrawals per month. It is also FDIC insured.
I’m currently using an Ally savings account for short term savings, which has no fees, no minimums, and currently a 2% APY for all balance tiers. And that number has been bumped up several times over the past year or so; in all likelihood it will go up further in the future. It’s a nice option for an emergency fund that you want to be liquid at any given moment; it’s also a nice choice if you want to continually add money each month. As far as I’m aware, you can’t do that with CD’s.
My issue isn’t that I have targeted savings but work in slightly volatile industry. So I want about 6 months saved and not sure where to hold it. It can have some risk more than a bank savings account where it is right now. Just not sure I want that in stock marker where all other retirement savings are stored. Just at a loss what to do with it.
I do not think 10 year is a short term duration as mentioned – but if you know that you will not need cash for a specific time period that is longer than CD terms (from 1-month up to 10 years),
If you have a short term goal till the 5 years, it is ok to go for CDs, More than 5 Years, i will definitely think of Stocks or ETFs.
I’ve been using a Capital One MMA, which currently has an APY of 2% (with balance of at least $10K).
I was going to transfer some to a Vanguard CD after reading this, but saw that the minimum purchase amount for all Vanguard CDs is $10K. So I’ll pass on that for now . . .
You can get many of these CD’s online at the respective bank, without as high of a minimum, and simply use Vanguard as a rate comparison tool.
Awesome article! I personally prefer to set aside as much as I can into long term savings/investments, but when I do save for the short-term I love my Ally account’s interest rate!
Ally savings for me – 2% returns and I have everything from very short-term (like Christmas gifts and travel) and mid-term (like a Euro trip summer 2020) My house funds are currently in a Vanguard MMA that pays a dividend and a bond fund.
If I put $1000 in a 6 month CD at 2.40% I will have $1024 when I go to withdraw it in 6 months?
No. The rates presented on CD’s are annual rates.
Our online savings is with Syncrony Bank paying 2.02% interest. Just took out a 15 month CD with them paying 2.85% (minimum deposit $2000 to get this rate). They transferred the funds directly from our savings account to open the CD.
Vanguard is one of my go to’s for these. By selecting how much risk you are willing to take you can have a fund that will hardly go down with the market, if at all. The returns usually beat inflation (assuming the average 3%) and are fairly liquid. There are even MMAs available on Vanguard.