By Christy Bieber,
The Motley Fool
Where should your money go?
The United States is facing a time of unprecedented challenges right now due
to the novel coronavirus and a recession resulting from efforts to combat it.
During these difficult times, it's more important than ever to save money --
and to make sure you're putting that savings in the right place. Of course,
there's no one right answer for where to stash your cash as there are many
different types of accounts and investments that are well suited to specific
situations.
If you aren't sure where the best place to put your money is, here are 12
different options.
1. Checking account
If you need money to cover short-term expenses, a checking account is the
right place to put it. For most people, paychecks are deposited into a
checking account and money is withdrawn shortly thereafter to pay bills or
cover other expenditures.
The good news is, money in your checking account doesn't have to just sit
there. There are a number of checking accounts now that actually pay you
interest at competitive rates.
If you aren't concerned about maximizing the annual percentage yield (APY) you
earn on the money in your checking account, at a minimum you should make sure
your account doesn't charge you monthly fees. There's little reason to pay for
the privilege of doing your banking when so many offer services at no cost.
2. High-yield savings account
For money you'll need soon, but not immediately, a high-yield savings account
is often the best bet.
High-yield savings accounts often pay a better rate than checking accounts.
Plus, by moving some of your money into savings, you're less likely to spend
it right away and can work on building a big pot of cash you can use to
accomplish specific goals such as going on vacation or buying a home.
A high-yield savings account is also a good place for your emergency fund.
While you hopefully won't need to tap that fund anytime soon, you want it
accessible in case you do.
3. Money market deposit account
Money market accounts (MMAs) are a cross between a savings and checking
account.
You'll usually get a higher interest rate on a MMA than you would with a
checking account but can also write checks or use a debit card to access your
money, which you can't usually do with most savings accounts.
Money market deposit accounts are generally FDIC insured, just as most bank
accounts are. But they do come with some additional restrictions that checking
accounts don't -- and you'll usually need to meet requirements such as
maintaining a certain minimum account balance to avoid fees.
If you can live with the limitations of an MMA account, have enough money to
deposit to avoid fees, and want to score those higher interest rates, they may
be your best bet for money you'll need in the short term.
4. Money market funds
Money market funds aren't to be confused with money market deposit accounts as
there's a risk of loss with this investment (albeit a slight one). Money
market funds are not FDIC insured, unlike most checking, savings, and money
market deposit accounts.
Money market funds invest in short-term fixed-income investments with a high
degree of liquidity, such as U.S. Treasury securities with a short maturity
date.
Money market funds usually provide lower returns than other fixed-income
investments, such as bond funds -- but the investment is a liquid one and also
carries very minimal risk. If you want a higher return than savings or money
market deposit accounts can provide but you want to ensure access to your
money when you need it, they're worth considering.
5. Treasury bonds, bills, or notes
Treasury bills, bonds, and notes are all debt instruments backed by the full
faith and credit of the United States.
Treasury bonds have a long maturity date and are usually issued in terms of 20
or 30 years. They pay a fixed rate of interest every six months until
maturity, after which you're paid the face value of the bonds.
Treasury notes mature within two to 10 years, so provide more flexibility.
Again, you'll receive interest at a fixed rate every six months until
maturity.
Finally, Treasury bills are very short-term securities which mature in
anywhere from a few days to a year. Bills are sold at a discount from their
face value, and you're paid their face value when they mature.
These investments are safe ones because the U.S. government is very unlikely
to default, and you can often earn a higher rate than with savings, checking,
or money market deposit accounts. But you do have to tie up your money. If you
don't plan to use your cash for a while and you don't want to take much of a
risk with the money, these can be a good option.
6. Certificates of deposit
Certificates of Deposit, or CDs, are fixed-income investments that allow you
to earn an interest rate premium in exchange for agreeing to leave your money
invested for a certain length of time.
CDs generally offer higher interest rates than savings, checking, or money
market deposit accounts but again require you to tie up your money for a
period of time.
Short-term CDs usually have terms of a year or less, while long-term CDs have
terms lasting at least five years -- and there are also options in the middle
as well. For money you won't need for a year or more, these can be a safe
investment choice.
7. 401(k)
If you're investing for retirement, a 401(k) can be the optimal place to put
your money -- if your employer offers one. A 401(k) is a tax-advantaged
account, so you can put money in with pre-tax dollars. Your employer may also
match a portion of your contributions, which is free money you won't want to
pass up.
Once you've put money into your 401(k), you'll have to choose what to invest
in. You'll usually have a choice of a limited number of funds depending on
what your plan allows.
Be aware there may be fees associated with both your account and with the
funds you invest in, and you generally can't take money out until you're 59
1/2 without incurring early withdrawal penalties.
8. IRA
An individual retirement account (IRA) is another option and an ideal place to
park retirement money. You don't need an employer to open an IRA for you, and
IRAs also provide tax breaks for retirement investing.
If you choose a traditional IRA, you'll be able to deduct contributions in the
year you make them, while a Roth IRA allows you to make tax-free withdrawals
but you'll invest with after-tax dollars.
You can open an IRA with any brokerage, and most don't charge fees. You'll
also have a much broader choice of investments than with a 401(k).
If you don't have a workplace retirement plan, an IRA is likely your best
option for where to put retirement funds. If you do have a 401(k), you may
want to invest enough in it to earn your employer match and then use an IRA
for additional retirement savings so you can benefit from a broader choice of
fee-free investments.
9. Health savings account
Health savings accounts (HSAs) are an investment option for you only if you
have a qualifying high-deductible health insurance plan. If you do, these
provide triple tax benefits and are a great place to save both for healthcare
costs you'll incur soon and for retirement.
You can contribute pre-tax money to an HSA, enjoy tax-free growth by investing
your contributed funds, and make tax-free withdrawals from your HSA if money
is used for medical expenses. After age 65, you can also take out money from
your account to use for anything you'd like, but it will be taxed at ordinary
income tax rates.
HSAs are a great investment vehicle to help you save for the high costs of
healthcare as a retiree while being prepared for emergencies you may
experience in the short term.
10. 529 account
If you're saving for your children's college, a 529 account is a good option.
These tax-advantaged accounts allow tax-free growth and, in some cases,
tax-free withdrawals as well. Different states operate their own plans, and
you'll have a choice of using the invested funds for a wide range of
educational opportunities.
11. Robo-advisor
If you're looking to invest but want to take a hands-off approach, a
robo-advisor may be the perfect solution.
Robo-advisors ask you a series of simple questions and invest money for you in
a diversified mix of assets that exposes you to an appropriate level of risk
given your investing timeline and goals. Algorithms are used to determine the
best investment options, and while you pay a fee for the robo-advising, it's
well below what you'd pay for a human investment advisor.
You can open many different kinds of investment accounts with robo-advisors,
including IRAs and 529 accounts.
12. Taxable brokerage account
Finally, taxable brokerage accounts provide you with the opportunity to invest
in assets of your choosing without restrictions on the withdrawals that can
come with IRAs or 401(k)s.
While you won't have any tax breaks for contributions, you can pick a wide
range of assets to invest in. Most brokerages don't charge commission fees for
buying investments anymore, and you can invest in shares of individual
companies, mutual funds, ETFs, and more.
What's the best option for you?
As you can see, you have ample different options for where to stash your cash.
The good news is, you don't have to pick just one. You can choose several
different options from this list and invest money in each account type based
on your specific goals for the cash.
See more at
The Motley Fool
