Here at Ellevest, we’re all about investing toward your goals — the long-term ones, that is. After all, the stock market has returned an annual average of 10% since 1928. We typically recommend investing any money you won’t need for at least two years into a diversified investment portfolio.
So … where should you put money you’re going to need before that? If you’re saving up for, say, next summer’s vacation, is there a certain type of account that’s better than others? This question feels especially relevant lately — with inflation at a 40-year high and the investment markets more up-and-down than a roller coaster, we’re all looking for a place where we can keep our money safe while earning the best interest rate possible.
The problem is, more interest often means less safe, and vice-versa. So what are the options, and which one is right for you? Let’s look at five: savings accounts, money market accounts, money market funds, certificates of deposit (CDs), and government savings bonds.
A few quick caveats
First: Your emergency fund should always, always be saved in an account that you can access anytime and is NCUA- or FDIC-insured. That’s not money you want to lock up or take chances with, even if the risk is small. If you need it, it needs to be there. We recommend a savings account.
Second: As you research your options, keep this in mind: If it sounds too good to be true, it probably is. Read the fine print — there’s going to be a tradeoff somewhere, be it risk, fees, minimum account balances, or something else like that.
OK, let’s dive in.
A savings account is a type of bank account that incentivizes you to keep your money in there by paying interest on the balance. (Banks can afford to pay you interest because they use the cash you deposit to make loans to other people and banks, which they earn interest for.) A high-yield savings account is one that pays much more than the national average.
Pros of savings accounts
They’re safe. True savings accounts are FDIC-insured (or NCUA-insured, if they’re from a credit union). That means the government guarantees that your money is safe, up to the limit of $250,000.
They pay interest. The national average interest rate is currently 0.11%, but some high-yield accounts are paying as much as 1.65%. That rate often changes as the federal funds rate changes (especially for high-yield accounts), which is good when rates are rising (like now).
They’re liquid. You can take your money out any time you want, usually via online transfer or sometimes ATM withdrawal.
They are inexpensive and widely accessible. Savings accounts are available from pretty much any bank that offers deposit accounts, and it’s possible (and advisable!) to find savings accounts with no minimum account balances or monthly fees.
Some of them come with helpful features, like “envelopes” or “buckets” you can use to organize all your savings for different goals.
Cons of savings accounts
There are usually withdrawal limits. If you make more than six withdrawals a month, you may have to pay a penalty fee. (It used to be required by law, but that was suspended during the pandemic and some banks relaxed the rules.)
The interest rate can be relatively low. Especially if it’s not a high-yield savings account. Although of course, this depends on the account in question and what you’re comparing it to.
Money market accounts
Also called a money market deposit account, MMAs are very similar to savings accounts. They’re also available from many banks, and they also pay interest and come with FDIC or NCUA insurance. The main differences are that MMAs may come with a debit card and ability to write checks, and they often require a minimum balance and charge monthly fees.
Pros of money market accounts
They’re safe and liquid, just like a savings account.
They pay interest. Some accounts are currently paying up to 2.10% (but with minimum balance requirements).
They often make it even easier to access your money, with checks and an account debit card.
Cons of money market accounts
They typically have minimum account balances and monthly fees, especially if you want a higher interest rate.
There are withdrawal limits, just like with savings accounts — typically no more than six a month or you get hit with a penalty.
Money market funds
Though they have almost the same name, money market funds — aka money market mutual funds — are not to be confused with MMAs. That’s because MMFs are investment accounts, not bank accounts.
MMFs are usually invested in relatively safe investments, like perhaps US Treasury or bank debt securities. They’re one of the most conservative investments out there (plus new laws introduced in 2008 reduced their risk even further), but it’s important to know that they are not risk-free.
Pros of money market funds
They may earn more than high-yield savings or MMAs, although not always. Historical MMF yields have been between 1% and 3%.
It’s not too difficult to access your money. You can often write checks or make electronic transfers, although there’s likely a minimum dollar amount.
Some MMFs invest in municipal bonds that have tax benefits, meaning the returns may be exempt from state or maybe federal income taxes.
Cons of money market funds
There’s risk. MMFs are investment accounts, and so they are not guaranteed. It’s relatively unlikely — but definitely not impossible — to lose money you put in.
They typically charge management fees, usually a small percentage of your account balance.
There may be a minimum account balance that you’re required to maintain.
Certificates of deposit (CDs)
Certificates of deposit are bank products where you agree to deposit your money for a minimum amount of time, and in exchange they pay a certain amount of interest. For example, you might buy a 5-year CD — in that case, you wouldn’t be able to access your money for five years (at least, not without paying a penalty). You agree to the length of time and fixed interest rate before depositing your money — the most common lengths are three, six, nine, 12, 18, 24, 36, 48 and 60 months.
Also note: There are plenty of different kinds of CDs out there with different terms, so read the fine print.
Pros of certificates of deposit
They may pay higher interest rates, depending on how long you’re willing to lock up your money. Right now, 1-year CDs are paying around 2%. The longer your term, the higher your rate is likely to be.
They’re safe, either FDIC- or NCUA-insured.
Cons of certificates of deposit
They aren’t liquid. Once you put your money in, you can’t access it without penalty until the CD’s term is over.
The interest rates are fixed for the whole term, which means if rates get better when your money is locked up, you won’t benefit. (On the other hand, if we were in an economic environment where rates were falling instead of rising, this would move to the “pros” column.)
Savings bonds (Series EE bonds and Series I bonds)
There are two common types of government savings bonds: Series EE bonds and Series I bonds. They’re similar, but EE bonds tend to pay a fixed, very low rate, whereas I bonds pay a rate that is part fixed, part variable and pegged to inflation (hence the “I” in the name). With inflation high right now, I bonds are paying 9.62% and so having a big moment — in fact, we wrote a whole piece on how I bonds work and their pros and cons, and we’ll focus on them briefly below.
Pros of Series I bonds
The interest rate is high right now, at a whopping 9.62%.
They’re pretty darn safe, since they’re issued and backed by the US government.
They have tax benefits. Interest earned on I bonds is often exempt from state income taxes.
Cons of Series I bonds
They aren’t liquid. I bonds lock your money up for a minimum of 1 year, and if you withdraw your money before 5 years has passed, you sacrifice your last three months’ worth of interest.
The interest rate changes every six months, since their rate depends on inflation. That means you don’t know what the annualized interest rate will be beyond the first six months of your bond’s life — even though you can’t withdraw your money for at least one year.
There’s a limit to how much you can put in. You can buy a maximum of $10,000 in I bonds per year.
So … where should you put your money?
We can’t tell you what you should do in an article like this, because so much depends on your situation, your goals, and your risk tolerance. But we typically lean toward recommending savings accounts for short-term goals because they’re so safe, liquid, accessible, inexpensive, and simple.
That said, the others could make sense in certain situations. For example:
MMAs might make sense if you have a large sum that easily hits the minimum deposit requirement, and they pay an interest rate that’s worth the extra fees.
CDs might make sense if you know for sure you aren’t going to need the money until the term is up, and you like the security of a fixed interest rate.
I bonds might make sense if you aren’t going to need the money for at least a year, but aren’t sure when you’ll want it after that.
At the end of the day, what matters most is that you’re choosing the option that meets your needs in the smartest, safest (and hopefully most interest-bearing) way. And, of course, that you’re saving up for those short-term goals at all. (Cheers to that!)