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As you build wealth, you want to make sure you're parking it in assets that will grow over time. However, in the near term, you're ideally looking for a place to park it in the meantime that focuses on maintaining its value. But there’s a problem—banks are probably not offering great rates for standard savings accounts. In fact, as of September 2024, the average interest rate is around 0.46%. That’s barely keeping up with inflation!
The good news is that you have suitable alternatives. However, with more choices, the obvious question arises: which one? For such a simple purpose, there are many options to choose from. So, when it comes to your short-term reserves, what exactly are your options? Let’s dive in.
When we park funds for short-term goals, we usually have a specific objective in mind. For near-term reserves, we ideally want:
With these criteria in mind, what are some suitable candidates for short-term savings?
This is by far the easiest account to open. It’s a standalone savings account but offers a higher interest rate compared to traditional savings accounts. These accounts are designed to remain competitive and attract savers by offering higher yields.
Typically, high-yield savings accounts have minimal fees and low to no minimum deposit requirements. In addition, they are typically FDIC insured, so your deposits are insured up to $250,000. If you're looking for convenience, this is a solid choice for short-term needs.
Many people like to utilize CDs for their short-term savings. Unlike savings accounts, the interest rate on a CD is locked in for a specific term. This is ideal if you expect interest rates to drop in the future. CDs can have varying durations, and the interest rates depend on the term and the bank’s outlook on the economy.
Since CDs require you to lock in your money for a set period, they often offer higher yields than savings accounts. However, if you withdraw your funds early, you may face penalties, so it's important to match the CD’s term to your financial timeline. If you're interested in locking in rates over time or laddering, this could be a good option.
T-bills are short-term bonds issued by the government. They work differently from typical bank accounts. As bonds, they have a maturity date, which is when the principal is paid back. T-bills are sold at a discount to their face value, and when they mature, you receive the full face value.
For example, if a T-bill has a 1-year term and offers a 5% yield, it might be sold for $952.38 and mature at $1,000.
T-bills are considered one of the safest investments since they are backed by the government. While their price can fluctuate before maturity, they pay out the full value at the end. If you're looking for safety backed by the government, this is a great option and can be laddered like CDs.
A money market fund is a mutual fund that invests in short-term, low-risk assets like T-bills and CDs. It operates differently from the other options because it's primarily held in a brokerage account. Unlike FDIC insurance, brokerage accounts are SIPC insured, covering up to $500,000, with $250,000 in cash.
Because money market funds are mutual funds, they come with an expense ratio, meaning there are management fees. However, they often offer higher yields than the other options. One key feature is that money market funds typically issue dividends, which are paid out to investors based on the interest earned from the underlying assets. While these are considered low-risk, they can occasionally lose value, though it's rare. If you're willing to pay for the potential of higher returns and prefer to keep your funds in a brokerage account, this could be a good option.
These options have similar profiles in terms of risk, time horizon, and function. Ultimately, the best choice depends on factors such as:
It’s important to do your research before choosing the right option. But if your short-term reserves are sitting in a standard savings account, consider spicing things up with these alternatives!
You know how to make money, but you're not sure if you're making the right moves financially. That's why I started Pashman Financial.
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PASHMAN FINANCIAL, LLC (“Pashman Financial”) is a registered investment advisor offering advisory services in California and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this website on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by Pashman Financial in the rendering of personalized investment advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content on this site is for information purposes only. Opinions expressed herein are solely those of Pashman Financial, unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation.
