An oft-overlooked but still vitally important aspect of investing is what you do with your cash. We get caught up thinking about the big money makers - stocks, real estate and business investing - and forget that having a healthy amount of interest-earning, liquid assets adds some needed diversity to your portfolio.
Cash savings enable you to move on new investments in a hurry, while also providing a safeguard in case a job is lost or a medical emergency deals an unexpected financial blow. If every penny you have gets tied up in an IRA or a mortgage, you might have impressive net worth and no means to show for it. Since investment accounts charge withdrawal fees and retirement accounts have tax penalties, having access to cash is the responsible thing to do.
Knowing you need at least some liquidity, you still have to think about where that money should go. There’s always the coffee-can-buried-in-the-backyard approach, but unless you have a crippling aversion to banks, I’d recommend not storing thousands and thousands of paper dollars on your property.
There’s no single best place for your cash, especially with fluctuating rates and varying personal preferences. The goal is to find a balance of good service and convenience; a decent interest rate, good customer care and accessibility all matter, and the bank that works well for one person might not meet another person’s needs. I’ll throw out a couple names in this post, but you should research local options and really think about the amenities most important to you before making a decision.
You’ll probably find the best interest rates if you take your savings to the internet. A handful of online accounts offer great rates, zero fees and FDIC insurance. Some online banks might even look too good to be true, and there’s a decent chance that will be the case.
I do advocate for some of these modern savings options. Big banks don’t deserve your money just because of name recognition, and a smaller, digital institution that actually does right by its customers definitely merits your consideration. A few banks worth looking into:
I’ll start with Ally because Ally is simply the bank to start with. 100 years ago, Ally opened as a branch of GM that was not yet called Ally and only worked in auto financing. That business model grew and morphed and evolved for about 80 years, and then everything exploded during the financial crisis. That’s when the company rebranded and quickly became one of the biggest and best online financial institutions.
Because Ally got a foot in the door so early, the company has built up significant assets and a vast number of clients. You can get a 2.20% APY with no minimum deposit and a free checking account without strings attached. That means your savings account can beat inflation even if you aren’t a millionaire.
There’s a knock on Ally for subpar customer support and people not always getting quick access to their money. That can be a little concerning, but on the whole, people seem to trust the bank and have been getting a strong return on their cash savings for a number of years.
If you want your digital bank to be an arm of a global juggernaut, Barclays welcomes you and your funds. The British bank that opened 100 years before America gained independence has old school roots and a new age model, allowing it to rival Ally and the other best-known online banks.
You can get the same 2.20% APY and no minimum account balance. There’s no banking fee and accounts are FDIC insured up to $250,000 (which is standard). Barclays is massive abroad and growing rapidly in the U.S., giving you peace of mind when it comes to the safety of your capital. Plus, if you do any traveling, people overseas will know about your institution and customer support shouldn’t be a problem.
Three big benefits with Synchrony: No minimum balance, 2.25% APY, and you can get an ATM card. With most online savings accounts having no physical location from which you can withdraw funds, the ability to get instant access to cash provides a big upgrade on accessibility.
This is a smaller bank you might not have heard of, but it grew out of the GE brand so it isn’t just some fledgling institution without sufficient assets. Bottom line, 2.25% on a readily available balance makes for some decent returns and great convenience.
There are another zillion or so online savings options, many of which offer APYs higher than those of Ally, Barclays and Synchrony. Vio Bank and CIT offer rates close to 2.50% and only require $100 to open an account, though CIT doesn’t offer the stellar interest rate unless you maintain a monthly balance over $25,000. Other companies, like North American Savings Bank, requires a $50,000 minimum balance in order to earn their 2.38% APY.
While the interest rates are good, access is an important thing to consider with online savings. With so many of these financiers operating exclusively in the digital space, you have to move money to another account before you can actually withdraw it. These transfers often take a few days, sometimes longer if there’s any sort of error with authentification. But, if the goal is to let the money sit and grow, Ally, Barclays or any other established institution is a fine choice.
If you want to go brick and mortar, it’s going to be less exciting. The APY will fall far short of the online alternatives, sometimes as low as .01%. Most of these banks look to secure your funds, provide insurance and then help you open a credit card or take out a home loan; the standard rates provide little incentive from an investing standpoint.
What you do gain from putting money in an account at Bank of America, Chase or Citibank is mitigated risk and ease of access. Through your debit card or checkbook, you can easily dip into your cash account. Insured up to $200K or $250K, there’s a sense of security during times of financial unrest. You’ll have access to 24-hour support and can usually find an ATM within a mile of wherever you are.
Perhaps most importantly, a comfortable relationship with a big band has the potential to open other doors. When it comes to getting a good mortgage or an SBA loan, a sizable savings account at Chase certainly won’t hurt your cause. So much financial history goes into having a loan application approved, and when you have an existing record with that institution - not to mention a bunch of money in their custody that they surely want to keep - you get to leapfrog over some of the other applicants. This is especially true when it comes to business lending, and quality business loans are often the hardest to get.
Don’t put money into a traditional savings account and expect it to grow into your retirement fund. Inflation is currently sprinting ahead of standard interest rates, so you can’t just accrue your way to comfort. If you happen to be in a position where you’re splitting your cash between accounts, you might stand to benefit from keeping some of the capital with a big bank.
CDs blur the lines of liquidity while still offering a safe place to store cash. The issue is accessibility, as you’ll only get a worthwhile rate if you agree to leave the money alone for upwards of three years.
I don’t recommend putting all your cash into a certificate of deposit or a share certificate from a credit union, as you get tied up and lose the flexibility that makes cash useful. However, with the right bank and a good rate, CDs relieve some of the exposure you have to deal with in the stock market while not trapping your money away until you’re 59 the way an IRA does.
Today’s certificates deliver a fair amount of flexibility. Some of the options include:
● Step-up CD
● Jumbo CD
● Low-Penalty CD
With the step-up option, you can have an incrementally increasing APY, an incentive to leave your deposit for longer. The jumbo CD requires a high minimum balance in exchange for higher rates, earning more in the long term but limiting your flexibility. The low-penality options are just the opposite, offering a low APY but enabling you to move money more freely.
While I tend toward stock investments over CDs, I recognize the usefulness for risk-averse investing. Using what most advisors refer to as the laddering technique, you can spread a significant amount of money into certificates without completely upending your liquidity. When you “ladder” your funds, you put money into several different CDs, each with a different range of terms. So you have a few thousand dollars tied up for one year, a few thousand tied up for two, a few thousand tied up for three, and so on. When the first year ends, you have access to that money to reinvest into another five-year CD. After four years of this process, you can have a five-year deposit maturing every year.
If you get into the ladder system and don’t run into liquidity problems, you can end up getting a decent return on CDs without sacrificing all your liquidity. A $2,000 deposit should get you an APY above 3% at a number of banks, including Barclays and Synchrony. Your money will stay safe and you’ll be able to access a portion of it annually, which may or may not work for your situation.
They aren’t my favorite option, but if you have money you definitely don’t want tied up in the fluctuating market, give CDs a look.
I don’t push bonds as the centerpiece of an investing strategy, but I definitely appreciate how they can balance and diversify a portfolio. For a common financial term that most people use regularly enough, there’s still a mystifying element about bonds people need to push past to understand how these investments work.
In short, buying a bond turns you into a lender. The government and numerous businesses issue bonds to gain capital, then pay annual or semi-annual interest, depending on the established rate. Some rates are fixed, others fluctuate and leave room for bigger gains or a potential prepayment. Prepayment doesn’t mean you lose money, but it does often negate years of interest you could have earned if the bond had fully matured.
Like with personal and business credit, you can get unsecured and secured bonds. Unsecured means trouble if a business goes under, but you usually bring in higher annual returns while the bond is in play. A secured bond means assets are promised to you in any event, just with a less impressive interest rate. However, bonds aren’t FDIC insured, so safety isn’t guaranteed the same way as it is with a saving account or CD.
Unfortunately, bonds have interest-rate risk, meaning investors take a hit if interest rates rise during the maturation of the bond. Bonds will usually beat the APY of a savings account at the outset, but there’s definitely exposure to volatility that other options don’t entail.
If you go with this option, I’d suggest looking into municipal bonds. Those are often tax-free and let you keep your dollars local, lending to the city, state or county. If it all works out, you’ll get untaxed interest payments and the funds you provide will go toward public projects like schools, hospitals and roads. Even if the return isn’t great, at least you can feel good about the cause.
When you think about what to do with cash, you might have to break away from the accessibility concept just a hair. It all depends on how much capital you have in play, because I definitely don’t want you taking your emergency fund and using it to buy a three-year CD. Take care of pressing obligations before you start thinking of the best places to put your cash.
As long as you have enough money to spread between different accounts and assets, you should feel free to investigate options beyond your existing checking and savings accounts. Any of these four are worth exploring, just make sure you do your research before pulling the trigger.