4 Best Places to Stash Your Short Term Funds Now

Places Stash Your Funds

After the 2008 financial crisis, the Federal Reserve (the Fed) slashed interest rates to basically zero for several years. That left savers in a pickle as to where to stash their short-term funds.

You can see below, that in the past 20 years, the federal fund’s interest rate had never been lower. They only dared to start increasing them again in late 2015 and they have been increasing ever since.

This was necessary to kick-start the economy and keep us from nose-diving into an even deeper financial abyss, or so we were told. That was good news for the stock market and the economy. We are currently on the tail end of the longest-running bull market in history and the unemployment levels are at record lows.

For short-term investors, however, it has been a different story. We’ve struggled with near-zero interest rates for years. Only now, as the Fed’s increases have recently edged up past 2% are we starting to see a glimmer of interest rate hope.

It’s time to dust off the old short-term savings playbook and figure out where to stash your short-term funds. The days of earning zero percent interest on your savings account funds are hopefully long gone.

Top Four Places to Invest Your Short-Term Funds

#1 – High-Yield Online Savings Account

  • Default Risk: Low (FDIC or NCUA insured)
  • Liquidity: High
  • Return: 2.0%-2.25%
  • Uses: Emergency funds

High-yield online savings accounts are deposit accounts available through online banks that pay a higher interest rate than traditional brick and mortar savings accounts. If the bank that you open the account with is an FDIC-insured bank, then your funds are insured for up to $250,000.

If you open an account through a credit union that is insured by the NCUA, then your money is secured by up to $250,000 through the National Credit Union Share Insurance Fund.

This money is very safe, and you can withdraw it at any time as you see fit.

#2 – Money Market Account

  • Default Risk: Low (FDIC or NCUA insured)
  • Liquidity: High
  • Return: 2.1% – 2.3%
  • Uses: Emergency funds

Money Market Accounts (MMAs) are like high-yield savings accounts in many ways. They offer higher interest rates than traditional passbook savings accounts and are fully insured by the FDIC or NCUA as appropriate up to $250,000.

What makes them different from high-yield savings accounts is that MMAs usually offer check-writing privileges and include a debit card. High-yield savings accounts do not offer these features.

MMAs are very safe and you can access these funds at any time.

#3 – Certificate of Deposit

  • Default Risk: Low (FDIC or NCUA insured)
  • Liquidity: Time-Bound
  • Return: 2.6% – 3.1% (depending on the term)
  • Uses: Short-term savings goals, e.g. a car or down payment on a house

Certificates of Deposit (CDs) are savings certificates with maturity dates and a fixed interest rate that can be purchased in any denomination. The defining feature of a CD is that it restricts access to your funds until the maturity date. Maturity dates are usually available in various increments up to five years, e.g. 6 months, 1 year, 18 months, 2 years, 3 years, 4 years, and 5 years.

In return for your restricted access to the funds, the bank gives you a higher interest rate than you would generally receive from a high-yield savings account or MMA. Similar to the other accounts we have covered, CDs are fully insured by the FDIC and NCUA.

The only real risk with a CD is that you may need the funds before the maturity date. If so, you will likely have to pay an early redemption fee to get your money back.

If you know you won’t need the money for a definitive period of time, then a CD may be right for you.

#4 – Short-Term Treasuries

  • Default Risk: None (Backed by the full faith and credit of the United States)
  • Liquidity: High
  • Return: 2.3% – 2.7% (depending on the term)
  • Uses: Emergency funds or short-term savings goals

The U.S. government sells treasuries to investors and uses the proceeds from these sales to fund various government projects and initiatives and to basically pay their bills.

There are three primary types of Treasuries which can be classified by their term to maturity. Treasury Bonds have the longest term and are issued with maturities of 20 and 30 years. Due to their long terms, these treasuries are not relevant to our discussion of short-term investing.

Treasury Notes have shorter maturities than Treasury Bonds and are typically offered to investors with one-, five-, seven- or 10-year terms. Treasury Bills have the shortest maturity with terms of four, 13, 26, or 52 weeks. Both could be used for short-term investing needs.

Treasuries are the ultimate in safe investments. They are backed by the U.S. which has never defaulted on its debt payments and also has the power to tax and print money. If the U.S. were to default on its debt payments, the least of your worries would be the return on your treasuries. It’s likely the entire economy would collapse.

If you hold them to maturity, then there is no return risk. You will get what you paid for. But, if you must sell them before their full maturity and interest rates have gone up in the meantime, there is the chance that you could lose money on the sale.

Similar to CDs, if you know you will be holding on to them for a certain amount of time, they can be a nice place to put your money. And, if you need to access the money early, there is no penalty, just the chance that they may have gone down in value. They also may have gone up.

Treasuries also have a unique benefit in that they are exempt from all state and local taxes, however, they are taxed at the federal level. If you live in an area with high state or local taxes, then that could tip treasuries in your favor.

Treasuries can be purchased directly from the government at TreasuryDirect or fee-free from VanguardFidelity, or Schwab.

The Bottom Line on Short Term Funds

So, there you have it. Four great vehicles that will let you stash your short-term funds and get a little interest too. Thank goodness that the Fed has kept those interest rates rising.

Use a high-yield savings account or money market account if you want easy access to your money at any time. If you already have a brokerage account or don’t mind working directly with the government, you can get a little more interest with Treasuries and save on state and local taxes as well.

Finally, if you know you won’t need the money for a pre-determined length of time, then lock in a higher interest rate with a CD.

Where do you have your short-term funds? What other vehicles might be appropriate

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