There are lots of reasons to put money into a savings account, including saving for emergencies or for short-term goals. If you’ll need the money soon, saving it rather than investing it in a brokerage account is the right move. You can’t afford to risk losses that could result if investments are timed poorly.
While keeping your funds in an accessible savings account with a bank or credit union is a good idea, the national average interest rate on these accounts is very low. In fact, according to the FDIC, it’s just 0.46%, which means any money you have in a savings account paying the national average rate is likely losing ground because it’s not keeping pace with inflation (price increases that happen over time).
So, what should you be doing with money you must save for short-term goals? You have two options.
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Put the money into a high-yield savings account
If you need to keep your money ready and available to you at any time, a high-yield savings account is most likely the best place for it. While the national average savings account rate is very low, high-yield savings accounts are different. They often pay much higher rates, with some accounts currently offering yields of up to 5.32%.
You’ll want to shop around to find the best savings account rates available to you based on how much money you have invested (some banks only pay their highest rates if you maintain a specific balance amount). And of course, be sure the account is FDIC insured so you face no risk. Virtually all savings accounts from major financial institutions and even most online banks are FDIC insured, but you can confirm by using the FDIC’s BankFind tool.
One downside to be aware of is that savings accounts have variable rates, so the rate you’re being paid now could decline if rates go down over time. But a high-yield savings account is always going to pay a better rate than the national average. There’s no reason not to shop around and find an account that’s as competitive as possible — especially if you’re keeping a good amount in savings to be prepared for emergencies.
Buy a certificate of deposit
You also have another option: You can buy a CD. Certificates of deposit also come with FDIC insurance coverage so there’s no loss risk. The national average CD rates are higher than the national average savings account rates. It’s absolutely possible to find really competitive yields, with the best CD rates coming in at 5.55%. This means they’ll beat high-yield savings accounts as well.
Now, there is a possible downside. CDs require you to make a commitment to leave money invested for a period of time (usually between three months and five years, depending on what CD term you choose). So you’d only want to put money in one of these if you won’t need it for that period of time and are 100% sure you won’t have to take it out early. Breaking a CD term early can trigger penalties.
If you’re saving for a medium-term goal, such as a vacation in a year or buying a house in three years, a CD can be a great way to get some of the highest returns available on a risk-free investment. CD rates are also guaranteed for the whole CD term, they aren’t variable like savings account rates. So, if you think interest rates will fall soon, that’s another reason to opt to use some of your savings for a CD.
Ultimately, both of these options can be much better than putting your funds in a savings account paying the national average rate. Check out high-yield savings accounts and CDs today to see if any are right for you.
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