Keeping Your Cash Under the Mattress? Put It Here Instead

February 23, 2015

Over the past several years, interest rates have been at historically low levels (for more on interest rates, check out our post What Happens When the Fed Raises Interest Rates.) While this is great for people looking to spend money using credit (e.g. homeowners and credit cardholders), it means people who choose to put money away to spend later can be left with virtually no return on their savings.

The most common vehicle for short-term savings is a savings account from a commercial bank or a credit union. The nice thing about a savings account, of course, is its liquidity—you can withdraw from it whenever you want, and they usually have low, if any, minimum balance requirements. However, over time, inflation will eat away at the value of your savings balance.

Fortunately, there are a few ways to make some money off your savings. Be aware, these are investments and carry risks.

Certificates of Deposit

Called CDs for short, these are savings vehicles that allow a financial institution to hold on to your money for a specified amount of time in exchange for a slightly higher interest rate than you would receive in a savings account. The interest rates for CDs shift frequently, so make sure you keep an eye on them. You can find them on the websites of most financial institutions. Check out the SEC’s page on CDs for a lot more information.

Money Market Mutual Funds

Although the name might be similar to a mutual fund like you might find in a 401k or other investment plan, Money Market Mutual Funds (also called Money Market Funds or MMFs) are different. The primary difference is they are liquid, in that you can withdraw and deposit funds from them at any time (unlike a mutual fund buying shares of stock, or a CD which has a penalty for early withdrawals) and they invest primarily in bonds rather than stock. Depending on your risk tolerance, there are different types you can invest in, with varying levels of interest paid.  One important difference between an MMF and a savings account like you would have at your bank is they are not insured by the Federal Deposit Insurance Corporation or any other government backed entity. The SEC has a page on MMFs which goes into more depth.

Treasury Bills

Often called the safest investment in existence, Treasury Bills (aka T-Bills) are backed by the “full faith and credit” of the United States government. While it’s true that they do provide one of the safest short-term investments for people looking to get a better rate of return than a standard savings account, they can fall victim to long-term inflation risks. Similar to MMFs, they don’t have a penalty if sold before maturity (however, they can carry interest rate risk). Another important factor to keep in mind is ordinary investors must purchase T-Bills through a self-directed brokerage account (SDBA). Although some retirement accounts allow an option to put money in an SDBA, it is not recommended because of the risk of losing principal value to inflation. Make sure you’re familiar with fees, costs, and other risks when you’re considering opening an SDBA.

US Savings Bonds

Another “safe” investment because of it’s backing by the US government, US Savings bonds (AKA Series EE bonds) are short-term savings vehicles offered by the government. They have interest rates that are related to the yields of T-Bills. They only credit interest every six months, so if you’re not willing to leave your money in it for that long, consider something more short term, or more liquid. You need to open an account at treasurydirect.gov in order to purchase these, or any other products sold by the treasury. You can also go there to learn more about other types of US government securities.