7 smart places to keep cash savings

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How to save cash: 7 ways to protect and grow your liquid savings

You can do much better than keeping it under the mattress.

Stockpiling physical cash may feel secure, but it is not the best strategy. Saving money this way is a recipe for lost, damaged, or stolen funds. Furthermore, those stacks of bills will not generate any interest.

If you want to save, protect, and grow your money, keeping physical cash is not the ideal approach. Instead, consider using a secure, insured account that also allows your balance to accrue interest.

Here are seven smart places to keep cash savings.

Checking accounts are popular, in part because they are so practical. They make it simple to deposit and withdraw money, pay bills, and write checks. However, the very features that make them ideal for daily money management make them a less optimal choice for long-term saving.

Most checking accounts do not earn interest, so your money typically does not grow in this type of account. Because these accounts are designed for frequent transactions, you may be tempted to spend your savings rather than keep them. For these reasons, checking accounts are most effective when used alongside a dedicated savings account. This allows you to categorize your money based on what you need for immediate expenses versus what you plan to save for the future.

2. Traditional savings account

A traditional savings account is a secure location for your funds, protecting your balance at any insured bank or credit union.

The primary drawback of a traditional savings account is that you will not earn much in interest. Many large banks offer savings accounts with variable rates around 0.01% APY, which, on a $10,000 balance, would result in only $1 of earnings over a full year.

Additionally, keep in mind that unlike checking accounts, some savings accounts impose transaction limits. This can make it more difficult to withdraw your money whenever you wish without triggering a fee.

A high-yield savings account functions like a traditional account, with one significant difference: you can earn competitive interest on your balance. For instance, the top high-yield savings accounts currently offer upwards of 4% APY. At that rate, a $10,000 balance could generate over $400 in one year.

To provide such high interest rates, many banks with high-yield accounts operate entirely online. However, these accounts receive the same FDIC protection as those at traditional banks, making them a reliable choice for your savings.

Money market accounts (MMAs) are essentially savings accounts that often include features typically found in checking accounts, such as debit cards or check-writing capabilities.

Compared to traditional savings accounts, money market accounts usually pay higher interest rates, similar to those of high-yield savings accounts. However, MMAs may require high minimum balances, which can be a barrier for those just beginning to save.

Certificates of deposit (CDs) are a type of deposit account that provides higher earnings in exchange for reduced flexibility. In fact, some of the best CDs available today earn up to 4% APY.

When you open a CD, you select a term, which is the specific duration you must keep your money on deposit. During this period, your balance earns a fixed interest rate, but you generally cannot access your funds without a penalty or make additional deposits. Like other accounts at banks or credit unions, your CD deposits and earnings are federally insured.

If you have savings you know you will not need for several months or years, a CD is an excellent way to earn predictable interest over a set timeframe. However, it is not the best choice for emergency funds or money you might need on short notice; if you withdraw your cash before the term expires, you will face early withdrawal penalties.

Cash management accounts (CMAs) are similar to checking accounts, but they are offered by brokerages rather than banks or credit unions. The best CMAs offer rates comparable to other high-yield deposit accounts (currently around 3%-4% APY) and may include checks and an ATM card. Some cash management accounts also integrate investment features, allowing you to easily transfer funds from your cash account into your investment portfolios.

Insurance also functions differently with cash management accounts. Brokerages are not insured by the FDIC or NCUA. However, they often partner with banks to provide FDIC insurance for your cash. This can allow CMAs to offer more than the standard $250,000 in insurance, as brokerages can sweep your deposits into multiple FDIC-insured banks.

When your money is held within the brokerage, it is covered by SIPC insurance, provided the brokerage is insured. SIPC insurance protects up to $500,000 in securities and cash if your brokerage firm fails.

Treasury Bills, or T-bills, are short-term debt instruments sold by the U.S. Department of the Treasury. When you purchase a Treasury Bill, you buy it at a discounted rate. When the bill reaches maturity, you receive the full face value.

Treasury Bills have terms of one year or less, and you can buy them in $100 increments. T-bills are issued electronically, and you can purchase them through a broker or online, especially when compared to CDs

The earnings on Treasury bills are similar to those of CDs and high-yield savings accounts, with the longest maturities currently earning the equivalent of more than 4% APY. T-bills are extremely low-risk, and while they are not FDIC-insured, they are backed by the U.S. government. One strategic way to utilize T-bills is to purchase them after you have reached the FDIC insurance limits at your bank.

How to decide where to keep your cash

Any of the account types listed above are a secure place for your cash, but each comes with its own set of advantages and disadvantages. The best account to protect and grow your money depends on your specific goals for your savings.

For example, if you are building an emergency fund, your cash should be in a safe and accessible account, such as a high-yield savings or money market account. You do not want your money tied up in a CD if you end up needing it unexpectedly.

Conversely, if you are saving to buy a home in 12 months, you might prefer a CD or Treasury bill because of their predictable timelines and earnings.

Another factor to consider is the current interest rate environment. CDs offer fixed interest rates, allowing you to lock in high rates if you anticipate a falling-rate environment. On the other hand, if rates are expected to climb, a high-yield savings account, money market account, or cash management account might be a superior option.

There is no single correct place to save your cash. However, it is generally wiser to use one of these accounts to take advantage of their security and convenience rather than hiding bills under your mattress and hoping for the best.

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