5 Places to Invest Your Cash

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Are you one of those people who has a lot of cash on hand? Maybe you’re getting ready for a home purchase, or you just received a bonus, or you want to know where to keep your emergency fund.

Is it worth it to buy a CD? Should you keep it in a high yield checking or high-yield money market account? This guide is designed to help you pick the best place to invest your cash.

Before we get to your options, keep three things in mind when it comes to holding cash. First, is the account liquid or must you tie up your money for a period of time (as with a CD or I bond)? Second, what’s the best interest rate you can find for the type of account you choose? Generally, the more liquid an account, the lower the rate. And finally, is your money safe? FDIC insured accounts and government bonds are considered the safest, but often come with lower rates in exchange for the safety. Still, safety can’t be underestimated, as this article shows (one man lost most of his life’s wealth overnight!).

The good news is that interest rates are likely on their way up. Now on to your options–

High-Yield Checking Accounts

Yes, it’s true. Some banks will pay you interest on your money in your checking account. Some banks require you to live in a certain area or belong to certain organizations (this is particularly true of credit unions). In contrast, some national banks offer high-yield checking, which means you can have an account there regardless of what part of the U.S. you reside. You can see a regularly updated list of checking account promotions here.

There are a few things you should know before diving in to a high-yield checking account: most of these accounts have a “balance cap” at $10,000, $20,000, or $25,000. This means that if you’re looking to stash $100,000, you’re only going get a great rate on a certain dollar amount and anything above that amount earns a lower rate.

In addition to a balance cap, there are other things to watch for as well. Many high-yield checking accounts require a certain number of check card purchases each month, and some might require bill-pay, electronic statements, or direct deposit. It is important to research what these requirements are before signing up for the account. You can find a list of some of the best high interest checking accounts here.

High-Yield Money Market Accounts

I am a huge supporter of high-yield money market accounts because many have fewer restrictions: no minimums, no monthly fees, no balance caps, and the ability to nickname your accounts. If you want to compare high-yield savings accounts you can go here. A few that always rank highly are Ally and Capital One 360 (formerly ING Direct), because of the reasons I listed above. The current interest rate on Ally’s money market account is .84% whereas CapitalOne 360’s rate is slightly lower at .75%.

If you are looking for an easy place to stash a lot of cash, then high-yield money market account might be a great fit for you. For example, if you had $100,000 and the rate was .75%, you would earn around $750 per year. Keep in mind that the FDIC limit is $250,000 per depositor, per insured bank. So you don’t want to have more than $250,000 in any one account. (If you have this problem, then I recommend that you talk to a CERTIFIED FINANCIAL PLANNER™ because you might benefit from more advanced financial planning. You can find one on: www.letsmakeaplan.org).

Certificates of Deposit

Investing in Certificates of Deposits (CDs) has been a popular choice among retirees for decades, but with the current rates being so low, you might be better off keeping the cash liquid and using a high-yield checking or money market account instead. When you purchase a CD you are locking up your cash for a set period of time, in exchange for a specific rate of return. For example: if you know you are going to be using the cash for your child’s college in 3 years, then you may want to get a CD so you don’t use that money for something else in the meantime.

Currently, one-year CDs are paying around 1% in interest. If you want to compare current CD rates, you can do that here. 5-Year CDs are paying slightly more, so if you know you don’t need the money for at least 5 years, then a longer term CD might be a good fit for you. If you have more than 5 years before you need the money, then you may want to consider investing in a brokerage account.

I Bonds

I Bonds are issued by the U.S. Government that earns interest by combining both a fixed interest rate and a rate adjusted for inflation. The minimum purchase is $25, and you can buy up to $15,000 in I Bonds each year ($10,000 via Treasury Direct and $5,000 in paper I Bonds bought through your tax refund). It’s important to note that you cannot withdrawal your money for one year, and you will incur a penalty if you cash an I Bond within five years.

Peer-to-Peer Lending

The final option on our list is peer-to-peer lending. Through companies such as Prosper and Lending Club, you can invest in loans directly with the borrowers. P2P lending is the riskiest option listed here, as you are investing in unsecured consumer debt. The potential reward is also highest.

Pros and Cons of Each:

High-Yield Checking

  • Pros: The best interest rates on cash can be found here. Your money is easily accessible with a check card.
  • Cons: There is often a balance cap. Lots of hoops to jump through in order to qualify for high rate.

High-Yield Money Market

  • Pros: No minimums, no fees, and no upper limit on the amount that you can invest. Your money is fairly easy to access.
  • Cons: Interest rates aren’t that high: between .5% and 1%. Sometimes it can take 2-3 business days to access your cash.

CDs

  • Pros: If you are saving your money for a specific purpose in 1-5 years, then you may want to invest in a CD so you don’t access the funds for something else.
  • Cons: Current CD yields are low. Lack of accessibility.

I Bonds

  • Pros: Backed by the U.S. Government, adjusted for inflation, and often earns a rate higher than a traditional savings account.
  • Cons: There is a limit to the amount you can buy each year, your money must remain in the account for at least one year, and there is a penalty if you withdrawal funds before five years.

Peer-to-Peer Lending

  • Pros: Investing in P2P loans is very easy with sites like Prosper and Lending Club, and the potential returns are much better than the other options.
  • Cons: There is a risk that you could lose money.

Information provided is for educational purposes only and is not intended as investment advice. Please consult a financial planner or investment advisor for advice specific to your financial situation.

Published or Updated: March 24, 2014
About Sophia Bera, CFP®

Sophia Bera, CFP®, founded Gen Y Planning to bring financial planning to her generation. She's a is a tech-savvy CFP® who brings financial planning to people in their 20s and 30s for the price of your gym membership. She's not your father’s financial planner, but more like your financially savvy best friend!

Comments

  1. Salman Khan says:

    In regards to Peer-to-Peer Lending being unsecured, there is a solution.

    According to the article P2P lending is the riskiest option but brings you the most returns.

    How about if I told you this option could be the LEAST risky and still bring you the MOST returns!?

    It is called P2P lending backed with real estate and it is the most secure way to invest using P2P lending.

    Please visit my website or email me if you have any questions :)

  2. Conor Foley says:

    I’d always recommend an investor allocates 5%-10% of their Portfolio to something reasonably speculative, based on a solid analysis of the opportunity. I’m not talking about Oil Exploration or Penny Shares, but something like Gold, for example. I know Gold has had a dreadful last 6 months but at current levels I would argue that the downside is limited from here and is something that Buy & Hold investors should consider including in their portfolio. I will be back here at some point in the future when it has doubled in price to say “I hate to tell you, but ……..!!”

  3. Spencer says:

    The returns on cash-like assets have been abysmal in recent years. I’ve enjoyed my returns with Lending Club but the risk is there, so I’m not willing to allocate more than 10% of my investable assets to it. There really isn’t a good place to park cash these days. I’m holding on to as little cash as possible and investing as much as I can in a variety of assets.

  4. David says:

    This is just a comment about long term CD rates. The interest rates are higher on long term CDs. i.e. 5 year versus 1 year. You lose the last 6 months of interest if you withdraw early. If you are putting emergency funds in the CD, you do not know how long the money will be there. If the money is going to be in the CD longer than a year, it is better to risk losing the last 6 months interest. You make out better even if you lose 6 months interest. If the withdrawal date is pre-determined, match the CD term with the withdrawal date.

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