You have some extra money, and you aren’t sure what to do with it. Where should you put your money so it’s being as useful as possible?
You have several options for where to save money, both for the near and distant future.
You may decide to use any or all of these savings tools. But you also might determine that just two or three are a good fit for now. For example, if you haven’t saved any money for a rainy day, it might be a good idea to open a high-yield savings account before you dive into investing.
Here are the various places you can save your money, depending on what you want your money to accomplish.
Where to save your money for each goal
The best place to save your money depends on a variety of factors. But here are the general rules of thumb for where to save:
- Checking accounts: Best for upcoming purchases, such as rent or a night out with friends
- High-yield savings accounts: Best for high interest rates and low minimum deposits
- Money market accounts: Best for high interest rates, high minimum deposits, and easier access to your money
- Certificates of deposit: Best for fixed interest rates and for money you don’t need to use immediately
- Individual retirement accounts: Best if you want to save for retirement and a) you don’t have an employee-sponsored account with a match, or b) you want additional retirement savings along with your company’s account
- Employee-sponsored retirement accounts: Best if you want to save for retirement and your company matches your contributions
- Other types of investments: Best for diversifying your portfolio
Keep reading to learn more about each type of savings tool and whether it’s a good fit for you.
1. Checking account
A checking account isn’t the best tool for saving money for future goals. You won’t earn much interest, and keeping your saving and spending money in the same place can make it tempting to spend more than you anticipated.
But there can be a couple reasons to put extra money in a checking account. You might want more cash in checking if you’re worried about overdrawing, or if your bank has been charging you monthly fees for not keeping a minimum balance in your account. Or you may just feel you need more breathing room in general.
There are also some solid rewards checking accounts that pay high interest rates. These types of accounts make it more beneficial to keep a higher balance than regular checking accounts. But if your main focus is earning a high rate, you may want to go with a type of savings account.
2. High-yield savings account
Plenty of large national banks — think Chase, Bank of America, or Wells Fargo — offer savings accounts, but they pay next to nothing in interest rates.
A high-yield savings account pays significantly higher rates than regular savings accounts, and most don’t charge monthly service fees. You can find high-yield savings accounts at online banks such as Ally, Discover, and Capital One 360.
A high-yield savings account is a good place to save money you might need quick access to, because you just have to transfer money into a checking account. You can usually withdraw money up to six times per month at no penalty, but most banks have waived or extended this rule during the coronavirus pandemic.
3. Money market account
Plenty of national brick-and-mortar banks offer money market accounts, but you might want to open one with an online institution. Like high-yield savings accounts, online money market accounts pay higher rates and rarely charge monthly service fees.
There are a few key differences between high-yield savings accounts and money market accounts, though.
Money market accounts often pay even better rates than high-yield savings accounts, although it varies by bank. The former usually require higher opening deposits, usually a few thousand dollars — but again, this will depend on which institution you choose.
If you can afford the opening deposit, a money market account could be an even more convenient place to keep your emergency fund than a high-yield savings account. Money market accounts typically send you a debit card and/or paper checks, meaning you can withdraw money without having to transfer money into a checking account first.
4. Certificate of deposit (CD)
When you open a CD, you select a term, such as six months, two years, or five years. You put money into the CD for the entire term and earn a fixed interest rate. This means your rate can’t change after you open the account, unlike with a high-yield savings or money market account.
A CD probably isn’t the best place to store your emergency fund, because you’ll pay a penalty to withdraw money before your term is up. But if you expect to need the money in the next few years or so, you may prefer a CD to risky investments, like the stock market.
5. Individual retirement account
Saving for retirement is a crucial step in reaching and maintaining financial health. An IRA helps you save for retirement separately from your employer. These accounts are useful if your job doesn’t offer a retirement plan, or if you already save with your employer but want additional retirement savings.
There are two main types of IRAs: traditional IRA and Roth IRA.
With a traditional IRA, you don’t pay taxes now, but you pay taxes when you withdraw funds later. A Roth IRA has you pay taxes now, but not when you take out money.
There are pros and cons to each type of IRA, and to IRAs in general versus other retirement savings accounts. Overall, they’re seen as great ways to save for the future. Just remember that this money is meant to be used during retirement, unless you have an outstanding circumstance that would prompt you to take out funds early.
6. Employee-sponsored retirement account
Your type of employee-sponsored retirement account depends on what type of business you work for. For instance, you might have either a traditional 401(k) or Roth 401(k) with a private company, a 403(b) with a nonprofit business, or a 457(b) with the government. Each type of account comes with its own rules and tax benefits.
Are you wondering whether you should start saving with an IRA or your employee-sponsored account? Ideally, the answer is “both.” But if you feel you only have enough money to start saving in one or the other, here’s one simple tip for making a decision:
Does your company match your contributions at all? For example, your employer might match 100% of your contributions to your 401(k), up to 3%. So if you put 3% of each paycheck into your 401(k), your employer contributes 3%, too.
If the business matches your contributions, you probably want to put at least the amount they’ll match into your account, if possible. This way, you’re basically getting free money toward retirement.
7. Other investments
IRAs and 401(k)s are good tools for investing in stocks, bonds, and funds. But you may want to look into other types of investments, too, especially if you’re looking to diversify your portfolio or meet certain goals.
For example, you might decide to open a health savings account. An HSA is an investment account that can help you save for retirement, but you can also use the money specifically for health and medical expenses.
Or you could invest in real estate. There are several ways to invest in real estate, including buying a home and renting it out to tenants, or investing in a real estate investment group (REIG).
You might have a clear idea of your goals and best places to save your money. But if you’re questioning the best path to take, consider reaching out to a financial adviser. They can talk to you about your short-term and long-term financial goals and the best ways to reach them.
