You may be saving money for a down payment to buy a house. Or perhaps you’re saving money for your wedding or for a long overdue vacation. Or you’re saving money to cover an emergency, like a sudden loss of your job. Whatever your reason is for saving, you will need to decide where to park your cash.
But where should you keep your savings if you want to grow your interest earnings?
Obviously, the best place to save money and earn interest at the same time is a place where the risk of losing your money is very low. Luckily, there are several of such safe places where you can put your cash (whether it’s $500, $1000, or $5000) and earn interest.
5 Best Places to Save Money
1. Savings Account.
If you have a modest amount of money or if you are new to saving money, a bank savings account is the most logical place to start. You can just visit your local bank, make a deposit or make a withdrawal or visit an ATM. Money saved up in bank savings accounts are very safe. They are insured by the Federal Deposit Insurance Company (FDIC) by up to $250,000.
The downside is that savings accounts in a brick-and-mortar bank offers very low interest. You can expect to earn an annual yield anywhere from 0.01 to 0.30%. To illustrate, a $10,000 deposit with an annual 0.02% yield only returns a $2 in interest. But despite their relatively low interest earnings, they are safe, liquid, and you can easily access your money.
2. Online savings accounts or high-yield savings account .
Online savings accounts or high-yield savings accounts are better choices, because they offer a relatively higher interest rate than a traditional savings account. That’s the only key difference. The high APY is what makes them appealing to savers. For example, CIT Bank offers 2.45% API, which is multiple times better than what a typical bank savings account is offering.
3. Certificates of deposit
If you’re looking for a safe place to park your money while earning a competitive interest rate, then certificates of deposit or CDs are right for you. Certificates of deposit can be bought through a bank, credit union, or a brokerage firm. They are issued for a specific amount of money for a specific time.
The length of time can be anywhere from 6 months, a year, 5 years, or 10 years, etc. When the CD “matures,” you get the full amount of money you originally invested, plus interest. However if you withdraw before the maturity date, you’ll get a penalty for the early withdrawal.
Like savings accounts, certificates of deposits purchased through a federally insured bank are insured for up to $250,000. So if you have a set date in mind when you need the money, whether to use it as a down payment on a house, then a regular CD is a good choice as it tends to pay a higher interest rate than a savings account. Also, note that online banks tend to pay higher rates than your traditional bank.
4. Money Market Mutual Funds
A money market mutual fund is a type of mutual fund. Unlike savings accounts and certificates of deposit, money market funds are not FDIC insured. The money in the fund is invested in the market, thus there is a higher risk compared to money in a savings account or high-yield savings account. But they are safe, because they invest in low risk securities.
Plus, they offer a way better interest rate than a traditional savings account. For example, the “Vanguard Prime Money Market Fund returns 27x more than the national savings account average.” You can purchase a money market fund through Vanguard or your bank.
5. Saving Bonds and Treasuries Bills.
Another place to put your savings with as little risk as possible is in savings bonds. Savings bonds are issued by the U.S. government. Just like certificates of deposit, savings bonds have a maturity date. And when it “matures,” you will get the money you originally invested plus interest. Again, just like CDs, you can cash in at any time, but there will be a penalty for “early withdrawing.” You can buy savings bonds at a bank or online at Treasury Direct.
Treasuries bills and notes, are another save place to keep your savings. Just as savings bonds, they are backed by the U.S. government, so there is guarantee of getting your money back if something goes wrong. There is a difference between a treasury bill and a treasury note. A treasury bills is bought at a discount. When it matures, you’ll get its full face value. For example a $500 bill might be purchased for $490. When it matures, it will be worth $500.
Whereas treasury notes not only can be purchased at a discount and can be cashed in for the face value at maturity, but also you can earn a fixed rate of interest every six months.
Whatever your savings goals or needs are, there are options available to you. If you’re thinking of buying a house in 5 years and need to save for a down payment on the house, perhaps certificates of deposit or a money market fund, or even bonds and treasuries is better option for you.
If you’re looking to save money for a shorter-term goal such as going on a vacation, then you can find good rates in high yield savings accounts. You might be saving to cover an emergency, like needing money to repair your car, then a savings account might the most appropriate. Whatever the case may be, you want to make sure your saving is safe and earns you interest at the same time.
Additional tips: Consider getting financial advice.
You can talk to a financial advisor who can review your finances and help you reach your saving goals Find one who meets your needs with SmartAsset’s free financial advisor matching service. You answer a few questions and they match you with up to three financial advisors in your area. So, if you want help developing a plan to reach your financial goals, get started now.