For a short-term savings alternative, where should you turn?
If you have a long-term investment strategy, then you understand the importance of making your money work for you. But do you apply that same approach to smaller sums of money that could be working for you over the short-term? You may not think about this when it comes to your savings — your emergency fund or your cash stashed away for short-term goals, but you could be missing out on the opportunity to make that money work for you too.
Lazy Cash is a Big Problem
Today’s low-interest-rate environment practically encourages ignoring the value of your short-term cash. Traditional savings accounts have offered interest rates near zero since the 2008 financial crisis. It’s no wonder consumers spend little time focusing on managing short-term funds.
Unfortunately, this inertia is costing big money. At Personal Capital, our two million dashboard users have over $41 billion in cash sitting in savings, checking, or money market accounts. We estimate that these consumers may be losing approximately $900 million annually simply because they aren’t parking their short-term cash in the most advantageous spot*.
If your money is sitting in your checking account or a traditional bank savings account, you’re among those who could benefit from making a change!
There are Some Easy Solutions
Many people leave extra funds in their traditional checking or savings account because it’s just a default solution. All of us are or have been guilty of just letting money sit in our bank accounts at one time or another. If you have any significant amount of cash sitting in your low-interest checking or saving account, you’re losing money in two ways: 1. Bank fees may cost more than you’re earning on your funds. 2. Paltry interest rates paid by traditional banks don’t always keep pace with inflation.
So, needless to say, it might be good to explore other options for any short-term cash that isn’t invested in the markets or your emergency fund.
5 Higher-Yield Account Types for Your Short-Term Savings
Here are some alternatives to traditional, low-yield savings accounts.
Typically, these accounts are associated with online institutions. They provide several advantages beyond higher yields on your money—typically more than 2% return versus way below 1% from traditional banks. The advantages of high-yield accounts include FDIC insurance (just like your traditional bank), high liquidity (some have withdrawal restrictions, but they are not overly restrictive) and convenience (your money is readily available).
We recently introduced Personal Capital Cash™**, a high-yield account starting at 2.30% APY*** And it’s not just for our current users or wealth management clients, it’s for everyone.
Money Market Accounts
This option is very similar to a high-yield account, including FDIC insurance. At many financial institutions, the differences between a money market account and a savings account are negligible. However, money market accounts are more likely to restrict the number of withdrawals per month, so you may want to explore those restrictions before choosing between the two options.
Certificates of Deposit (CDs)
While CDs are designed for short-term investors, they do carry withdrawal restrictions based on the length of CD you purchase. For example, a 3-month CD will tie up your funds for three months, while a five-year CD means you can’t touch the money for five years. The longer the time period, the higher the yield. However, CDs work best only if you know your funds will not be needed during that period. If you need the money sooner, you’ll generally pay early withdrawal penalties, which takes a big bite out of your overall return.
Short Term Bond Funds
These mutual funds invest in short-term bonds, both corporate and U.S. government bonds. These funds are less risky than their equity market-equals, although there is some inflation risk. The advantage of a bond fund versus a CD is flexibility. You can withdraw money from a short-term bond fund without penalties, so your money is not tied up for a specific period. However, you will pay fund fees, which can eat into your return. Be sure to review the expense ratios of any short-term bond fund before you invest.
Money Market Funds
Unlike money market accounts, money market funds are mutual funds that invest in short-term U.S. government and corporate debt. They are not FDIC insured. And, theoretically, prices for these funds can fluctuate, but they nearly always maintain a stable price, so they are considered a safe investment for short-term money. While your money is readily available, these funds are not generally the savings vehicle of choice for consumers who want to regularly access their cash.
How Much Return Can You Expect?
Of course, return varies based on the short-term instrument you select and when you are shopping (rates are subject to variability, but in the current environment that fluctuation is minimal). The best way to determine which vehicle is best for you is to answer these questions:
- How much access do I need to my money?
- How much do I need or want in FDIC insurance?
If you want flexible access to your money and the extra protection of FDIC insurance, we’d recommend starting with a high-yield or money market account. For most investors with extra money sitting in a traditional checking or savings account, these are the best options. They tend to offer higher returns than traditional savings accounts, have few restrictions, are easy to open, and are FDIC insured. There is a possibility of greater return from other options, such as CDs or short-term bond funds, but it’s also important to consider the restrictions that will be placed on your money and the lack of FDIC insurance with some of these options.
*The national rate is calculated by the FDIC as of June 11, 2019 based on a simple average of rates paid (uses annual percentage yield) by all insured depository institutions and branches for which data are available. Savings account rates are based on the $2,500 product tier. Account types included in the FDIC calculation are those most commonly offered by the banks and branches for which they have data – no fewer than 45,000 locations and as many as 81,000 locations reported. The deposit rates of credit unions are not included in the calculation. Visit www.FDIC.gov for details. In this calculation, we are using the current national rate of 0.01%. More than $900 million in lost interest assumes the Personal Capital Cash interest rate of 2.30%.
** Personal Capital Cash is offered through Personal Capital Services Corporation (Personal Capital), which is not a bank. To participate in the program, you must open an account at UMB Bank, n.a., Member FDIC, through which your funds will be placed in accounts at participating program banks. The advertised interest rates are paid by participating program banks, not by UMB. Your funds will be FDIC insured up to applicable limits while in transit through UMB Bank. Personal Capital receives a fee from each Program Bank in connection with the Program that is based on the aggregate daily closing balance of deposits held in Program Accounts by such Program Bank. The fee may vary from Program Bank to Program Bank and will generally increase as the aggregate amount of funds held in Program Accounts with the Program Bank increases. See additional disclosures here.
*** The Personal Capital Cash Annual Percentage Yield (APY) as of June 11, 2019 is 2.30% APY 2.274% interest rate. The calculation for APY is rounded to the nearest basis point. For Personal Capital advisory clients, the APY is 2.35% (2.323% interest rate). Both the interest rate and APY are variable and subject to change at our discretion at any time without notice.