The Worst Places to Keep Your Cash

where to put savings

Whether you’re stashing cash away for an emergency fund or for a home down payment, knowing where to put savings is important.

Here are some of the worst places you can put your cash savings and why you should avoid them.

Checking account

A checking account is a transactional account where most people receive their direct deposit paycheck, pay bills, and use for day-to-day spending. Checking accounts are great because you can process as many transactions as you need and most don’t charge a monthly fee. However, they typically pay little, if any, interest.

Your cash shouldn’t sit idle earning no interest at all. If it is, you could actually be losing money thanks to inflation. At the current inflation rate, you are losing 1.74% per year if your savings are sitting in a no-interest checking account.

Pros:

  • Easy access to funds
  • Unlimited transactions
  • No monthly fee

Cons:

  • Little or no interest
  • Tempting to spend
  • Could lose value to inflation

Basic savings account

At most big brick-and-mortar banks, a basic savings account is free and works as a nice companion to a checking account. However, these big banks are looking to earn a profit and likely not paying you enough interest to make that type of account worthwhile.

Even more, Federal Reserve Bank Regulation D requires that banks limit you to six withdrawals per month. For most savings accounts, you won’t need more than six withdrawals per month. But with the measly 0.11% national average interest rate, you only need to make one withdrawal to get your money out of that account, which is losing value thanks to inflation.

Pros:

  • Quick transfers to checking at same bank
  • Can accept split direct deposit for faster savings
  • No monthly fee
  • Earns interest

Cons:

  • Low interest rate at most banks
  • Limited to six monthly withdrawals
  • Could lose value to inflation

Stock investments

The stock market is great for long-term investing, but your savings are too important to risk losing value. While the stock market typically earns more than inflation, it comes with plenty of risk, particularly when investing in individual stocks.

While your savings could grow to double or triple with stock investments, it could just as easily lose value.

The stock market is a great option for things like retirement savings because you have decades until you need those funds. However, in the short-term you never know what will happen, making it a big risk for more immediate money needs.

Pros:

  • Big potential growth
  • Options to invest in index funds for instant diversification

Cons:

  • High risk
  • Takes several days to access funds
  • Can lose value

Under the mattress

It should go without saying that you shouldn’t keep your money under your mattress — but it turns out lots of people do just that. In fact, a survey last year showed that over half of millennials are hiding cash outside of a bank account. It’s fine to keep a little cash in a secret hiding place, but keeping your savings there is a big no-no.

Cash is not FDIC insured, and can be easily lost or stolen with no possible recourse. As many Americans learned during the Great Recession, banks can go out of business, but your money is safe up to $250,000 thanks to the Federal Deposit Insurance Corporation.

Pros:

  • Quick access to cash

Cons:

  • Can be easily lost in a fire or flood
  • Can be stolen with no recourse
  • Not insured in any way (typically excluded from renter and homeowner policies)
  • Does not earn interest
  • Loses value to inflation

Where to put savings

Now that you know where to avoid putting your savings, let’s take a look at some better options to store your cash savings with the most liquid needs.

Online savings account

While similar in many ways to the basic checking accounts discussed above, there is one important difference found in an online savings account: the interest rate.

Brick-and-mortar banks operate expensive buildings and have to pay more employees to keep the business running. Online banks, however, have very little overhead. Thanks to the lower cost, online-only banks tend to offer much higher savings account interest rates than traditional banks.

Most online banks pay around 1% interest, which is about ten times the national average. I use an online savings account to store my home down payment fund and emergency fund.

Pros:

  • Better interest rate than traditional banks
  • Stable, FDIC-insured account
  • Can accept split direct deposit for faster savings
  • Most offer free online transfers to accounts at other banks

Cons:

  • May still lose value to inflation, but will do so more slowly
  • No bank branch for withdrawals or customer service

Certificate of deposit

If you’re putting cash into savings that you know you won’t need for a while, a certificate of deposit (CD) can be a good option. A CD is a type of savings account where you earn a higher interest rate than a standard savings account, but in return, your funds are locked away for a period of time.

For example, one-year CD rates can top 1.3%, which is about a third of a percent better than most online savings accounts. If you do need to access your funds before the period is up, you can typically do so by paying an interest penalty.

Pros:

  • Better interest rates than most savings accounts
  • FDIC insured

Cons:

  • Interest penalty to access funds early
  • Interest rates are still not great

Bond fund investments

While stock market investments are high risk and volatile, there are other investment options to consider for your savings. Remember: Your emergency fund should be easily accessible, and risking your home down payment is a bad idea. For other types of savings, however, an investment account could be the best option.

Investment accounts are not just for stocks — you can also buy a variety of funds and other investments. For example, a TIPS (Treasury Inflation Protected Securities) bond ETF allows your cash to grow with little risk and is adjusted to not lose value to inflation. Other bond funds include riskier corporate bonds, but are still considered very low risk.

Pros:

  • Returns that can beat inflation
  • Low risk

Cons:

  • While government bonds are stable, funds can lose value as interest rates change
  • Less liquidity

When considering where to put savings, your options are seemingly endless. But with a little research, you can maximize your returns and make sure your money keeps working for you — even after you’ve stowed it away for a rainy day.

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Published in Financial Tips, How to Manage Money Wisely, Smart Tips for Saving Money

  • I’ve discovered that using a tool like Betterment works great for savings that you want quick access to. Although you can include stocks, you can weight the account more towards bonds — and the funds are easily accessible whenever you need them! And although you are right that the stock market can be a bit risky, I know some of the leading personal finance bloggers put nearly 100% of their cash into the market. From my understanding, Mr. Money Mustache even has to sell stocks to pay off his credit card every month! Of course, when the market is high like it is now, that’s probably not the best bet…