Growing up, we're often told to save for a "rainy day fund" to cover emergencies or unexpected job loss. While having an emergency fund is essential, we believe it's worth rethinking how to manage and where to keep those funds.
Historically, keeping your money in a bank was a smart choice, as savings accounts earned interest and were far safer than stashing cash under a mattress. However, in recent years, the interest paid on checking and savings accounts has been minimal—often just pennies on the dollar. While banks can still be a good option for holding additional savings, it’s important to stay informed about available interest rates and explore alternatives to maximize the growth of your savings.
The table below shows different investment options for cash and savings.
Checking
- Basic way to store additional capital
- Most Liquid
- Lowest Interest Rate
- No Market Risk (Principal Fixed)
High Yield Savings
- Higher interest rates than “checking”
- Highly Liquid
- No Market Risk (Principal Fixed)
- Better alternative than normal Checking / Savings Account
Certificate Deposit (CD)
- Offer a fixed interest rate for a specified period of time
- Not liquid (fixed period of time – fees associated with pulling funds early)
- No Market Risk (Principal Fixed)
- Risk – associated with liquidity issues (locked up money)
T-Bills
- Bonds bought directly from US Government (under 1 year duration)
- Not liquid (fixed period of time – fees associated with pulling funds early)
- No Market Risk (Principal Fixed)
- Risk – associated with liquidity issues (locked up money)
Ultra Short Bond Funds
- Group of bonds with duration less than 1 year in length bought on stock market
- Market Risk – limited due to lower duration – principal will move with change in interest rates
- Fees: buy/sell in market & fund expense fee (generally on the lower side)
- Liquidity – not as liquid as checking / HY savings, but still liquid as no time restrictions or contract to own (can normally liquidate and move into checking within 3-5 days)
Short Term Bond Funds
- Group of bonds with duration between 1 and 3 years in length bought on stock market
- Market Risk – greater than ultra short duration due to increased duration
- principal will move with change in interest rates
- Fees: buy/sell in market & fund expense fee (generally on the lower side)
- Liquidity – not as liquid as checking / HY savings, but still liquid as no time restrictions or contract to own (can normally liquidate and move into checking within 3-5 days)
Short Duration High Yield Bond Funds
- Group of bonds with focus on higher yield (often corporate bonds with lower credit rating)
- Market Risk – is associated with “credit risk” as the lower duration in bonds do not affect the principal as much as the credit risk associated with the companies of the bonds.
- Bonds often lower quality companies which pay higher interest rates on bonds
- Fees: buy/sell in market & fund expense fee (generally on the lower side)
- Liquidity – not as liquid as checking / HY savings, but still liquid as no time restrictions or contract to own (can normally liquidate and move into checking within 3-5 days)
When deciding on if you are putting your savings and cash in the right spot, take a look at some of the alternatives listed above and see if the interest you can earn would be worth moving your funds around. If you would like an analysis of your current scenario, please contact your Financial Advisor and they would be happy to investigate your individual situation and find what is best for you.