Cash is king again for many unsettled investors.
The crisis in confidence that has spooked investors this summer is prompting many to pull their money from the stock market, with others poised to follow. The problem is, where to park it?
Here’s a look at the safest options and what you can earn on your cash.
Q: What are the best options for my cash right now?
A: If you’re primarily concerned about limiting your risk, you’ll want to focus on various bank products such as certificates of deposit, savings accounts and high-yield checking accounts. Their returns aren’t keeping up with inflation so they’re not a great strategy in the long run. But if your top priority is safety, at least for the near future, they offer plenty. Here’s a snapshot of key considerations.
Online savings accounts: The most reliable option for money you need swift access to is an online savings account. Rates top out at only about 1 percent. But these accounts are convenient and protected. The Federal Deposit Insurance Corp. guarantees money deposited in savings and checking accounts and CDs up to $250,000. An online account is ideal for your emergency fund or any money you may need on short notice, says Greg McBride, senior financial analyst at Bankrate.com.
CDs: If you won’t need the money for a while or can afford to park it for six months or longer, consider a CD. Top-yielding CDs with a one-year term pay up to about 1.25 percent.
Longer maturities offer higher yields, but not by much. Buying a five-year CD won’t even get you 2.5 percent. The highest current rate is 2.4 percent offered by First Internet Bank of Indiana, followed closely by Discover Bank (2.35 percent) and Aurora Bank (2.31 percent), as listed on Bankrate.com. And if climbing rates in the years ahead tempt you to take your money out early, remember that you’ll pay for it. The withdrawal penalty for CDs will typically dock you six months’ interest.
High-yield checking accounts: Sometimes called rewards checking accounts, these provide greater benefits under certain conditions. With most, if you make at least one automatic deposit or payment and at least 10 debit transactions a month, the annual percentage yield is 2.5 percent to 3 percent. The money is very liquid — you can get to it when you need it.
The downside? You have to meet those requirements every month to get the top yield. And there’s usually a cap, most commonly $25,000, on how much you can park in an account to earn the maximum return. If you fall short of reaching the required thresholds — say, if you make only nine debit-card transactions — your yield plummets to around 0.1 percent. So to make one of these accounts worthwhile, make sure you’ll be able to clear the hurdles every month.
Less appealing options:
Money-market deposit accounts: As with bank savings accounts, low yields of no more than about 1 percent make this a less attractive option. But safety is high and you will have easy access through checks, transfers and even ATMs.
Money-market mutual funds: These funds invest in short-term debt such as Treasury bills or corporate bonds. They generally offer slightly higher returns than money-market accounts. But you shouldn’t let your cash pile up there, McBride emphasizes. Unlike the other bank options, money funds are not FDIC-insured. And yields are a full percentage point or more less than those of online savings accounts.
Short-term bond funds: These should not be considered “cash” because of the risk involved. It’s possible to lose money in a bond fund. And bonds would lose value as interest rates rise.