20210330 Stash the Cash
Hello and welcome back to the podcast. Often in financial planning, we are planning for the future and managing finances can help you make that dream future a reality. But sometimes you have a need or goal and you’ll need pay for relatively soon, like in the next year or so? This may be for a house down payment, next year’s tuition, or to cover a gap in income while you take time off to care care of a newborn or right after retirement.
If you’ve got more than pocket change your saving, I recommend a bank. You don’t trust a bank? The Federal Deposit Insurance Corporation (FDIC) insures your deposits up to $250,000 per FDIC-insured bank per person per ownership category. It covers checking and savings accounts, CDs, money market accounts. Single accounts and joint accounts are separate ownership categories. More details at the FDIC. https://www.fdic.gov/deposit/covered/categories.html You can split the money among more than one FDIC insured bank. Your deposits are insured up to the limit at each bank.
Checking accounts provide quick easy access to your money . Savings accounts usually pay more interest but have a limit of six withdrawals per month by law. There are exceptions, and withdrawals and deposits can be for any amount.
Would like to earn more interest? Then Certificates of Deposit (CD) or a Money Market Account may be for you. CDs are offered provide a specific interest rate in exchange for you agreeing to leave a lump-sum deposit with them untouched for a set amount of time. At the end of the term they return your deposit with the interest to you. CDs are a good option when you know when you may need a set amount of money. You can count on the guaranteed interest. Match the amount of the deposit and time to withdrawal to your future need.
Money Market Accounts are also offered by banks and credit unions, and generally pay higher interest rates than savings accounts. They often come with debit cards and check writing privileges similar to a checking account, but like savings accounts you are limited on the number of withdrawal you can make each month. If you think interests rates may rise, the money market account may earn more than a long term CD. If you think interest rates will fall, locking in a set interest rate with a CD may be better.
On thing I really want to stress here is that a Money Market Account and a Money Market Fund are NOT the same. A money market fund is an investment sponsored by an investment fund company. There is no guarantee of principal, that means you can lose money you deposit with them. And they are not insured by the FDIC.
For all these accounts, shop around. The interest rates offered by different banks and credit unions vary widely. Check out online banks. Because they don’t have costs like a brick and mortar bank, they often offer some of the highest interest rates. And some may offer incentives, or special features. If you have more to deposit than the $250,000 FDIC per person, per account limit, considering splitting up your deposit between more than one bank or credit union. And remember you’re not going to get rich on the interest these accounts earn and it will likely not even keep up with inflation, so they are not very good long term investments. The ARE safe places to stash your cash so that you can be sure that it is available when you need, no gut wrenching roller coaster ride.
