Where can you park cash you expect you will need in a year or less? What about your emergency fund? Are you saving for a house, a wedding, or another financial goal that you expect to pay for in the short term? You’d like your money to earn something, but you don’t want to take too much risk. After all, the general rule says you shouldn’t put money in the stock market that you will need in the next five years.
I am asked the questions like the ones I shared above quite often. I also addressed the topic last week in the second session of my workshop – “How Female Investors Take Greater Control of Their Finances with Less Stress.” For the past few years, there haven’t been many good options. With interest rates on the rise, the options have improved. Note that none of these options represent good places for the bulk of your long-term savings. The returns they provide are unlikely to keep up with inflation. But when you want to protect your principal, you should consider them.
How Do I Get Started?
When it comes to saving cash for short-term needs, you should begin by “Paying Yourself First!” If you want to build a cash balance or save for a near-term goal, you should automatically route a specified savings contribution from each paycheck to a specific account upon receipt. That way you won’t even see or touch the money. It will go right into the account you designate.
But it’s one thing to save money. It’s another thing to have it grow. You shouldn’t put money under your mattress where it doesn’t earn anything. Until recently, the places you could put your short-term cash didn’t provide much better returns than your mattress. Now you have better options if you want to park cash that can and let it grow – at least a little.
Some Factors to Consider
Short-term investments represent amounts that you can easily convert to cash. It’s money that you expect to need sooner rather than later. It could also be money that you may need in an emergency. You don’t want to find yourself in a position where you must recognize a meaningful loss to access your cash.
If you have a savings goal that you expect to achieve in five years or less, you don’t need to let your money sit idle the whole time. Especially with the highest rate of inflation we’ve seen in decades, the risks that come with hoarding our cash have increased. Dollars you hide under the mattress significantly lag inflation. That means they buy less and less over time.
You don’t want to take risks with this cash, but you would like it to grow. Ideally, you want to put it in a place where you can access it easily. In other words, it should be highly liquid. You should avoid having to pay penalties to access the money.
Where Can You Park Cash for Short-Term Needs?
I know. Enough already. Let’s get to it. Where can you park cash so that it’s safe, liquid, and provides greater earnings than you can get from our traditional brick-and-mortar banks? Note that the options discussed below are listed based on ease of use.
1. Online Savings Account
What’s the easiest place to park cash for short-term needs? An online bank account. When comparing rates and terms for financial accounts such as savings, credit cards, and loans, I prefer starting with Bankrate’s website. As of Friday, the best available rate for an online savings account is 3.05% at Customer’s Bank. Capital One currently pays 3.00%. I’ve had an online account with Capital One for many years.
Opening an account is easy. You can do it through a link provided on Bankrate’s website. As with any brick-and-mortar bank you use, the banks Bankrate’s site that I’ve come across are FDIC members. That means you have the same protection conventional branches provide in terms of the safety of your money.
Many online savings accounts don’t have a minimum balance requirement either. You shouldn’t have to pay any fees as well. You usually can’t write checks with an online savings account. While the number of transactions in a savings account was limited in the past, the Fed recently removed this restriction.
Since you can’t go to a branch, you should link your online account to a conventional bank account. That way you can transfer money between the two accounts.
2. Money Market Account
In case you’re not familiar with them, a money market account is an interest-bearing savings product. Most banks and credit unions offer them. Brokerage firms often do as well. If you open your account at a bank or credit union, you can usually write checks from it. You may get a debit card as well.
As of Friday, CFG Community Bank offers the best interest rate – 3.55% – of the banks listed on Bankrate’s website. This account has a $1,000 minimum balance and a monthly fee of $10. Based on that, I would consider Sallie Mae instead. Sallie Mae’s money market account has a 3.20% annual percentage yield. But there are no monthly fees or minimum balance requirements.
Brokerage firms also provide a money market option as an alternative to holding cash. Charles Schwab serves as the custodian for Apprise’s clients. Its money market fund currently yields about 3%. These accounts are mutual funds. These accounts do not have FDIC protection, but they are low risk. Money market funds tend to offer higher returns than most money market accounts.
3. Certificate of Deposit
You typically must hold Certificates of Deposit (CDs) for the amount of time specified when you open the CD. If you need the funds before the CD matures, you normally pay a penalty. For example, you could lose three months of interest income if you close a one-year CD early. You might lose six months of interest income if you close a CD with a term longer than one year early.
Again, based on the information provided by Bankrate, you can find CDs with rates exceeding 4.0% and no specified minimum deposit.
If you’re willing to accept a lower rate, you can find no-penalty CD rates as high as 3.05%. (Scroll about a third of the way down the page I linked for those.)
4. Treasury Bills or Notes
Treasury Bills (TB) have terms ranging from four weeks to 52 weeks. They can be sold at a discount or at par (face value). You receive the TB’s face value when it matures. Interest is paid when the TB matures as well. While you pay federal taxes on the interest earned, you do not pay state or local taxes on TB interest.
You can buy TBs on the TreasuryDirect website. If you do, you must hold them for at least 45 calendar days before transferring or selling them. This holding period does not apply if you buy a new security by reinvesting the proceeds from a maturing security. You can only sell a TB that you do not hold to maturity through a bank or broker.
According to data provided by Charles Schwab, as of Friday, three-month Treasuries have a current yield to maturity (YTM) of 4.211%. This increases to 4.576% for six-month Treasuries, 4.699% for 9-month Treasuries, and 4.815% for one-year Treasuries. That’s also the highest current YTM for any Treasury listed on Schwab’s website – including 30-year Treasuries. (Note: YTM represents the percentage rate of return for a bond assuming you hold it until its maturity date. It includes the sum of all of its remaining coupon payments (interest) plus or minus any difference between the purchase price and par value.) (Note: Par value represents a bond’s face value.)
5. Longer Term Treasuries
If you buy Treasuries, you may want to ladder them. That means buying Treasuries of different maturities to protect against rates falling over time. This can also help make your income more predictable for a period of time.
Treasury Notes are intermediate-term government debt securities that mature in two, three, five, seven, and 10 years. They pay interest semiannually.
Treasury Bonds have a term of either 20 or 30 years. They also pay interest every six months until they mature.
As with TBs, you can buy Treasury Notes or Treasury Bonds from Treasury Direct or through a bank or broker.
6. I Bonds
I Bonds have become quite popular over the last 18 months or so. Why? Higher inflation. An I Bond’s interest rate is mostly based on inflation. I Bonds paid 7.12% in November 2021. In May 2022, this rate increased to 9.62%. It fell to 6.89% as of November 1, 2002. That includes a fixed rate of 0.40% and an inflation rate of 6.49%. The 6.89% combined rate is still the highest rate for I Bonds since they were introduced in 1998. The fixed rate is an annual rate that remains in place for the life of the bond. The other I Bond interest rates listed here did not include an annual rate. Rates for I Bonds change every six months.
If you would like to buy an I Bond, please keep the following in mind.
- Unless you receive a tax refund, you can only purchase $10,000 of I Bonds annually (per person).
- You can only purchase I Bonds through the TreasuryDirect website.
- You can purchase another $5,000 of I Bonds through your tax refund. You must file Form 8888 with your tax return to make this purchase. Such purchases can only be in $50 increments.
- You must hold an I Bond for at least 12 months.
- If you do not hold an I Bond for at least five years, you will pay a penalty equal to three months’ interest when you sell it.
- I Bonds earn interest from the first day of the month you buy them. Twice a year, the interest the bond earned over the previous six months gets added to the principal value of the bond.
- You do not have to pay any taxes on I Bond interest until you either cash it in or the bond matures.
- The current interest rate on I Bonds applies to any I Bond purchased between November 1, 2022, and May 1, 2023. You then earn that rate of interest for six months. After six months, the interest rate will be reset to the then-current rate.
Where to Park Your Cash – Closing Thoughts
I hope you find these suggestions related to where you can park cash you are accumulating for short-term needs helpful. Please note that there are other options such as short-term bond funds and peer-to-peer loans, but these also typically include more risk and higher volatility. If you have questions about any of these suggestions related to where to park your cash or would like some help deciding what would work best for you, please schedule a free call. I’ll gladly answer any questions and assist in whatever way I can.
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Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
Located just north of Baltimore, Apprise works with clients face-to-face locally and can also work virtually regardless of location.