Whether you’re saving an emergency fund or for a down payment on a house, you may have cash to stash. There are many options as to where to store it.
The first and most obvious place might be your checking account—but that’s not a great place for a couple of reasons. First, you could be tempted to spend that money as it builds in your account. Second, checking accounts tend not to offer any return on your money.
Savings accounts, on the other hand, have nearly the same liquidity—you can typically transfer the cash to your checking account within a day—but they also put your money to work. To be sure, interest rates remain very low—but even a small return is better than no return.
Read more: How Much Should I Save in My Emergency Fund?
We asked financial planner Sophia Bera CFP of Gen Y Planning, to break down your savings options:
Online Savings Account
The cost: “Good online savings accounts don’t have a minimum balance and no monthly fees,” Bera said.
Bera said she likes Ally Bank and Capital One 360 for her clients. Goldman Sachs also operates a popular online savings account with no minimum deposit to open. If you’re looking to temporarily store a large amount of cash—say the proceeds from a home sale—beware that some savings accounts have upper limits. (Goldman Sachs’ online savings accounts cap at $250,000, for example.)
The return: Bera said to look for banks with about a 1% annual percentage yield. Ally and Goldman Sachs are currently offering around 1% while Capital One 360 is offering 0.75%. You can check current rates with Bankrate.
“Good online savings accounts don’t have a minimum balance and no monthly fees.”
The cost: Like the online savings account, there should not be any fees to open a money market account. “It’s just a fancy name for cash,” Bera said. “It’s liquid. It’s easy to access.”
Note that while a money market account (sometimes noted as MMA) is very similar to a savings account, there are a few differences—including allowing for higher balances (if you want to store millions in cash) and potentially a limit on the number of transactions per month.
The return: The APY should be roughly the same as a high-yield online savings account, which typically between 0.80% and 1.00% these days. “You just want to check what’s the savings rate that you’re currently getting at your bank. Could you get something higher elsewhere?” she said.
CD (Certificate of Deposit)
The cost: While it doesn’t cost you to open a CD, you will be charged a fee if you need to access your cash before the savings mature. “And then that can lose all the return that you’ve made on that CD,” Bera said. There also might be a minimum opening balance.
With CDs, you guarantee to leave your money on deposit for a set length (banks tend to offer CDS in terms between 28 days and 10 years) and get a fixed return. However, with interest rates so low, to make any measurable money off your CD, Bera added, you have to lock in your cash for several years.
The return: “CDs right now are paying at a comparable rate to money market accounts which is why I’m not a huge fan of them right now,” she said. Bera advises clients to keep the money liquid, but keep an eye on CD rates in the future. “It’s not that compelling unless we are talking about hundreds of thousands of dollars and then maybe you should be investing elsewhere anyway,” she said.
Low-risk investment account
The cost: A small investment fee plus investment risk. If you might need this money within the next two to four years, don’t take an investment risk with that money, Bera advises.
“If the market goes down in the next few years you are going to be upset that your $50,000 is now worth $40,000 because the stock market went down 20%,” she says. But if you have a mid-range goal, say you might use the money in five to 10 years from now, a low-risk investment account could be a good idea if you put your money in a higher percentage of bonds and a lower percentage in stocks.
The return: It depends on what you are invested in and how well your portfolio performs, but generally you can expect you’ll see a return that would exceed cash savings if you are invested long enough.
“You might catch a bull market and see very favorable returns,” she said. “On the flip side, you could catch a flat market or a down market or not make that much money or lose a little bit of money.”
Cash under your bed
The cost: Nothing. Well, maybe. It’s a pretty risky place to keep it in the event of a fire or robbery.
The return: Absolutely nothing—and you could be losing more money if it’s stored under your mattress than in a savings account. The upside is that if you need that cash, you can instantly access it and you have complete privacy.
“Money loses value over time. Even if you’re earning 1% on your money and if inflation is 3% you are losing 2% a year just by having it in a savings account,” Bera said. “When you have it under your mattress you’re losing 3% a year.”
Of course, as Arrested Development fans know, there’s always the banana stand too 😉