A windfall gives people an opportunity to grow their savings, prepare for an emergency, and maybe meet a significant financial goal, like paying for their kid’s college. Whether someone received an inheritance or a raise or is just slowly adding to a stash of cash, there are plenty of places to store money.
Where to put cash depends on how much risk a person is willing to stomach, the SEC points out. There is the opportunity for a higher return for investors who choose to take on more risk. If investors have a financial goal that’s years in the future, they may be able to make more money by carefully investing in higher-risk assets, like stocks and bonds.
Conversely, if they have short-term financial goals, lower-risk cash investments may be more appropriate.
When deciding which investment makes sense, it’s crucial to weigh the risk and potential reward of each option.
So, to decide on the best place to put cash, here are several options worth considering.
Low-Risk Places to Put Cash
There are several choices for those who want a place to store their cash with minimal risk exposure.
Banks and credit unions offer checking accounts. Checking accounts can help account holders pay for daily expenses and save for a rainy day.
A checking account may come with an annual percentage yield (APY), which is the interest earned over one year, including compound interest. The APY provides a single rate that represents how much you will earn from your deposit within one year.
However, most checking accounts don’t offer any interest, and an interest-bearing account usually has balance or deposit requirements. The national average checking interest rate is hovering around 0.03% , data from the Federal Deposit Insurance Corp. (FDIC) shows, so consumers shouldn’t expect to see high returns on their checking accounts.
Additionally, depending on the bank or credit union, checking accounts may come with fees that can chip away at any return.
A savings account may provide a little more interest than a checking account. The national average savings account interest rate was 0.06% in April 2021.
Rates may vary by bank or credit union and may come with certain caveats, including account minimums or limits on the amount of interest an account can earn annually.
Similar to checking accounts, some financial institutions charge fees that can eat into earnings. There are also limits on how an account holder can withdraw funds.
Federal law normally limits online withdrawals or transfers to six per month; there are no limits on in-person or ATM transactions.
Like a checking account, a savings account is considered among the most liquid places to store cash for an emergency. Essentially, when a crisis arises and there is a need for fast cash, account holders can withdraw their funds quickly.
Money Market Account
A money market account is another type of savings account that comes with a few unique features.
For starters, money market accounts usually have higher interest yields than checking and savings accounts, but they usually require a certain deposit and a minimum balance before fees kick in.
Like savings accounts, they tend to limit the number of transactions made monthly via debit cards or checks.
Money market accounts invest in assets considered low risk, such as government securities, commercial paper, and certificates of deposit. (Traditional checking and savings accounts don’t invest in anything.)
The investments allow the account holder to earn a higher interest rate while maintaining FDIC protection, which also applies to checking and savings accounts and certificates of deposit.
The FDIC generally insures up to $250,000 per depositor, per FDIC-insured institution, per ownership category. The insurance kicks in if a bank or savings association fails.
It’s important not to confuse a money market deposit account with a money market mutual fund. Money market funds are not FDIC insured.
High-Yield Savings Account
Not only is a high-yield savings account a no-risk option, as long as the institution is FDIC insured, but it provides a higher interest rate than a traditional savings account.
Keep in mind that some high-yield savings accounts have minimum balance requirements and/or requirements for maintaining the account.
While variable-rate high-yield savings accounts are a solid low-risk place to store cash, the rate of inflation can be higher than the yield you earn overtime.
Higher-Risk Places to Put Cash
Investors may want to consider other short-term investments such as stock, bonds, and mutual funds that might yield a higher return if they have higher risk tolerance.
For investors willing to take the risk to potentially reap the reward, here are a few higher-risk places to put cash.
Investing in stocks can be advantageous for parking cash because stocks provide two potential ways to receive a return on the investment: through appreciation of the stock’s value and through dividend payments to shareholders if the company allows.
While this might be an oversimplification, the idea is that if the company grows, so does the investor’s share. In other words, shareholders can reap the benefits of a company’s wealth growth over time.
But it’s tough to predict a stock’s success because it’s hard to predict which businesses will profit in the future. Since the future is uncertain, individual stock returns may be volatile.
Yet purchasing individual stocks may also provide a higher return if investors select shares that are performers. That’s why it’s said that stocks are “high risk, high reward.” Therefore, if a stock dives, investors may lose all of their cash before accessing it.
It’s also important to note that in the event of needing cash in an emergency, the investor should be aware of the rules surrounding short- and long-term capital gains taxes. Investors must pay a capital gains tax when they sell assets such as stocks, bonds, or property. The amount depends on how long they have held the asset, their tax bracket, and the asset’s profit.
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Bonds are generally considered a lower-risk investment than stocks. Bond prices usually don’t fluctuate the way stock prices do.
High-yield bonds, also referred to as “junk bonds,” have a higher likelihood of default than investment-grade bonds and therefore have the potential of a higher rate of return.
One advantage of storing cash in bonds is that they can provide a reliable income stream. Investors can make plans based on the income payments and reinvest accordingly since bonds typically pay a set amount of interest twice a year.
There are several types of bonds.
For example, corporations issue corporate bonds to raise funds for initiatives. Corporate bonds usually provide higher interest rates than what investors see with other types of bonds, but the interest is taxable on both the federal and state level.
Typically, when the bond reaches maturity, the principal is repaid.
An exchange-traded fund (ETF) is a pool of securities such as stocks. ETFs give investors broad low-cost access to various markets. So instead of investing in one or a few stocks or bonds, ETFs give investors exposure to a sample of a market by tracking a single index.
Since ETFs invest in various companies, they are often considered more diversified and therefore lower risk than investing in one stock.
But like stocks and bonds, ETFs that are sold are subject to capital gain tax. If the ETF is held for more than a year, an investor must pay a long-term capital gains tax, or short-term capital gains tax on ETFs held less than a year, taxed at the person’s ordinary tax rate.
Therefore, if investors need some fast cash, they will have to consider the tax implications of selling their ETFs. While trading ETFs is pretty simple to do, most investors tend to purchase ETFs as a part of a long-term investment strategy to capitalize on their growth.
Where to put a stash of cash? A lot depends on risk tolerance. Other than a cache of cash in the bathroom wall, options range from a savings account to an ETF.
Another choice is a digital cash management account where you can save, spend, and earn, all in one place.
That’s SoFi Money® —where you can organize your money, set savings goals, earn cashback rewards, deposit checks, and more all from your phone.
Plus, having a SoFi Money® account unlocks the door to a cornucopia of SoFi perks.
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As of 6/9/2020, accounts with recurring monthly deposits of $500 or more each month, will earn interest at 0.25%. All other accounts will earn interest at 0.01%. Interest rates are variable and subject to change at our discretion at any time. Accounts opened prior to June 8, 2020, will continue to earn interest at 0.25% irrespective of deposit activity. SoFi’s Securities reserves the right to change this policy at our discretion at any time. Accounts which are eligible to earn interest at 0.25% (including accounts opened prior to June 8, 2020) will also be eligible to participate in the SoFi Money Cashback Rewards Program.
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Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
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