Where is the best place to park money right now?
Whether you’ve sold something recently, have money in a bank account, received unexpected income, or have extra cash in your pocket, this article will try to educate you on a few. of the best places to park money right now.
Personal savings in the United States exploded in 2020 amid lockdowns and increasing stimulus. Nonetheless, an increase in available liquidity was offset by historically low interest rates.
Many people use a savings or checking account when looking to park money. However, the average annual interest rate for a savings account in the United States is only 0.06% according to the Federal Deposit Insurance Corp. A balance of $ 10,000.00 would accumulate only $ 6 in interest per year.
So, is there a better option for where to park the cash right now?
The answer largely depends on what you plan to do with the money, what other investments and accounts you have, and how much money you have.
The first thing anyone should do with the money they are looking to park is reduce or eliminate high interest debt. By paying off the debt at high interest, this guarantees a return on investment equivalent to the interest rate charged on the debt. But that doesn’t include low-interest debts like mortgages and most student loans, because interest rates are so low that there is little incentive to pay them off sooner when better. opportunities are available.
The second best place to park money is to store money in an emergency fund. An emergency fund should cover six to nine months of expenses. Experts disagree on the exact amount of an emergency fund, with some saying as little as three and others saying a full year is needed, but six to nine months is a happy medium for the most individuals. A strong emergency fund will allow individuals to take greater risks and protect themselves against possible factors beyond their control. Generally speaking, the best place to keep money for an emergency fund is in a high yield savings account. More on those later.
For those looking to boost their retirement savings, it makes a lot of sense to put extra money into a traditional IRA or Roth IRA to take advantage of the benefits each one offers. However, contribution limits prevent individuals from storing large sums of money in these types of accounts and in most cases the money will not be able to be withdrawn without penalty until retirement. Either way, contributing extra money to a Roth IRA or traditional IRA makes sense for those looking to save more for retirement, want to lower their tax bill, or are unhappy with other investment opportunities. store money.
If you are looking for a shorter term solution to parking your money, look no further than a high yield savings account. These accounts generally offer the same liquidity as a regular bank account, have low or no fees, and earn much higher interest rates than traditional accounts. Many high-yield savings accounts offer rates close to 0.50%, which is almost nine times the national average. (See here for a list of a few options.) The tradeoff for this type of account is limited physical presence and focused online experience. However, it is the best option for the money which should be readily available at all times in the near future.
Two alternatives to a high yield savings account include cash management and money market accounts. These two types of accounts work similar to a high yield savings account and offer slightly higher interest rates. The difference is largely based on where the money is kept. Most money market or cash management accounts are usually invested in very low risk investments by the institution through which the account is managed, cash and cash equivalents. Money market accounts generally have higher minimums than high yield savings accounts and cash management accounts, and can limit the number of transactions per month. (Here is a list of some money market accounts and a list of some cash management accounts.)
The second best option for parking money depends on your time horizon. For money that can be left untouched for a period of more than a year, there are several different options for investing your money. These include certificates of deposit, bonds, treasury securities and bond funds.
Certificates of deposit, or CDs, are usually the easiest tool to save money in the medium term while still earning a higher return than a bank account can offer. In exchange for blocking your money for a set period of time, you receive a predetermined interest rate on your money. (To verify this list for certain common CD terms and rates.) Treasury securities, bonds and bond funds all offer exposure to the same type of investment product with investment risk ranging from US-backed Treasury securities to poor quality corporate bonds. While bonds and Treasuries may offer better returns than other options for parking money, they have longer term maturity dates with a more complicated buying process. Most investors would be in a better position to invest in a highly liquid bond fund that offers broad diversification and low fees to maximize returns and ease of use.
Another alternative place to park your money if your time horizon is longer than five years is to invest in a large exchange traded fund or an index fund like $ VTI, $ IVV or $ FZROX. These funds offer you sufficient diversification to significantly reduce risk while maximizing market returns through low-cost and tax-efficient strategies.
Finally, after you’ve exhausted all other options in any of the locations above, should you consider parking some extra cash in your traditional bank or checking account. While it’s important to keep these accounts well-funded enough for regular expenses, it doesn’t make sense to store large sums of money here, unless it’s temporary or a major purchase is imminent. .
Max Provencher is in his final year at Searsport District High School. He is currently Section President and Founding Member of Searsport Future Business Leaders of America, Vice President of the FBLA of Maine and National Treasurer of the FBLA. It helps promote business education and financial literacy to over 200,000 members around the world. Max is a passionate investor in stocks and bonds, and works hard to promote financial literacy in schools as a member of the Maine DOE Student Cabinet. In his spare time, he enjoys golfing and running with his Airedale terrier, Ginger.