savings

Where to Keep Your Savings Now

If you're hoping to earn a decent return on your money, the best place to stash it depends on how soon you'll need it.

"My CD matured. Where can I get a decent return on my money now?"

Call it an opportunity, not a problem. After all, how often do you latch on to a chunk of cash that's not already earmarked to pay tuition or fix the furnace? Take your time to construct a plan. "Go very slowly," says Joseph Quinlan, chief market strategist for U.S. Trust. Leave the cash in savings or checking temporarily, even if you earn zero interest for a spell. It's not as if forgoing a few days of slightly higher interest will deprive you of a gleaming new BMW.

 

Know Your Time Frame

If you took out the CD a few years ago, when banks were still paying respectable interest rates, you might have thought of it as an investment. But now, with rates as low as they are, think of the money as savings. And the way to manage savings is to earmark the money for when you’re going to need it: immediately, in a few years, or perhaps not for ten years or more. That will point you toward the best place to put the money now.

Cash Reserve

Your current bank is almost certain to offer so little in interest that it makes sense to open, or add to, a deposit account at an online bank. Although a yield of about 1% may not seem like much, you'll have instant access to the money — without fees and with Federal Deposit Insurance Corp. protection. If you were treating the CD as an emergency fund, that’s all the more reason to put it in this type of account. If six-month or one-year CD rates begin to outpace what the online savings account pays, you can put some money into a short-term CD and repeat the procedure every three or six months so that you’ll benefit as rates ease upward throughout the year.

Three to Five Years

Many people take out CDs to make sure they'll have cash at a specified time — say, to pay tuition or invest in a family business. Although we don't know what interest rates will be in 2017 and beyond, we see no profit in locking in a CD yield today. As long as the Federal Reserve restrains the cost of credit — and that's a certainty at least into the first few months of 2014 — you can comfortably house the money in a short-term, low-risk, low-cost bond fund. We like Vanguard Short-Term Investment-Grade (symbol VFSTX, current yield 1.6%) and Baird Aggregate Bond (BAGSX, 2.9%). You maintain overnight access to the money (so it still counts as savings), and you should be able to realize a total return of 3% to 5%.

Longer Than Five Years

If you already have cash in the bank or some other supersafe place, taking a moderate risk is likely to be worth the reward. Because long-term bond yields aren’t high enough to justify a possible loss of principal over the next several years, we suggest you move part or most of the CD proceeds into exchange-traded funds or stock or balanced funds that pay 2% to 4% in interest or dividends. (Again, you may want to leave part of the balance in a savings account as an emergency fund.) You can reinvest the investment income as you receive it, a plan that lets you buy some fund shares when they are cheap and others when they are not so cheap.

All the while, watch those bank rates. If you get a chance to buy a CD that yields more than, say, a fund that follows Standard & Poor's 500-stock index (currently about 2%), you may want to go back to the bank, especially if you have other money, such as an IRA, in the stock market.

Most Popular

The 15 Best Growth Stocks for the Rest of 2022
growth stocks

The 15 Best Growth Stocks for the Rest of 2022

A sharp selloff in growth stocks this year creates opportunity for keen investors. Here are 15 top-rated picks to consider in the second half of 2022.
June 28, 2022
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
Best Internet Banks
online banking

Best Internet Banks

These institutions operate fully online, which decreases their overhead costs and allows them to offer lower fees and higher rates than many other ban…
June 23, 2022

Recommended

How Big Should My Emergency Fund Be?
Brandon Copeland

How Big Should My Emergency Fund Be?

NFL linebacker and Kiplinger contributing editor Brandon Copeland discusses the importance of building an emergency fund.
June 30, 2022
Best National Banks
banking

Best National Banks

These large, brick-and-mortar institutions have branches in several states (as well as online banking), so they’re solid choices if in-person assista…
June 23, 2022
Best Banks for Retirees
banking

Best Banks for Retirees

With these institutions, retirees avoid pesky fees on checks and paper statements and have access to an array of additional wealth and investment serv…
June 23, 2022
Best Credit Unions
credit union

Best Credit Unions

Credit unions are not-for-profit institutions owned by their members. Those listed here are open to anyone in the U.S.; if you are not eligible based …
June 23, 2022