Where should I keep my short-term savings?

Dr. Preston Cherry

Dr. Preston Cherry

I keep $300,000 in cash that I plan to put toward a new home. With the purchase as is, I’m holding off on this purchase for six to nine months. I am 66 years old, single and planning to retire within the next 12 months. What should I do with the cash until I buy?

– Judy

When it comes to determining where to house your short-term savings, factors to consider include risk, access, goals and what will give you peace of mind.

These factors will determine where you store your cash. And ultimately, understanding your unique needs and preferences, and specifically your goals, will bring peace and clarity to your decision.

A financial advisor can help you create a financial plan for retirement. Find a financial advisor today.

How to rate short-term savings vehicles

Consider where to house your short-term savings.

Consider where to house your short-term savings.

There are several factors to consider when considering short-term funds.

Term and type. Short-term investments and savings should be easily converted to cash within three to 12 months (or less) without loss of capital value. They may have an opportunity for a small risk-free profit.

Danger. Do you want the funds to maintain capital value or earn a risk-free return.

Yes, there is an opportunity for short-term gains in various investment opportunities. But if you have to take the risk for those gains, you might absorb the shock of the sudden loss. Given your short time horizon, it’s best to avoid unnecessary risk.

Access. Ease of access contributes to your decision to store. Short-term events require fluidity and expediency. It won’t take more than a few days to liquidate and transfer cash to your target. Flexible access requires flexible financial institution location.

Target. Assigning a goal to your funds is an essential factor. A goal begins with a series of functional and emotional questions. These may include these:

  • What are these funds for?

  • What event, experience or outing am I preparing for?

  • What positive result do I want to have?

The answers to these questions will bring a sense of peace to your process and decision.

What are your short-term savings options?

Consider these accounts for storing your short-term savings.

Consider these accounts for storing your short-term savings.

Banks and credit unions.

Banks and credit unions have many advantages. FDIC insurance covers $250,000 of bank deposits per person, per bank and account ownership. Depending on account ownership, you can have more than $250,000 of coverage at one bank.

Credit unions insure $250,000 per depositor through the National Credit Union Association. An overview of the FDIC and the calculator are available here. An NCUA calculator is here.

You can spread deposit amounts across multiple institutions if your funds are too high to cover the FDIC insurance coverage at one institution. This strategy, however, adds a layer of personal management complexity.

Insurance isn’t the only benefit that banks and credit unions offer. Banks and credit unions offer liquidity and access.

Cash does not require liquidation. Cash is cash when held in a savings account, which provides the fastest form of access, liquidity and portability. Banks and credit unions tend to offer robust online platforms with electronic capabilities. Brokerage options will give the same.

Major banks and credit unions offer multi-service platforms that enable customers to use their funds efficiently and access expertise in areas such as mortgages, loans, brokerages, trusts and banking. If you think you’ll need any of these services over a short-term time horizon, banks and credit unions may seem more appealing.

A potential downside is the low interest rates on your capital. However, several reliable and secured online banking platforms offer attractive savings account interest rates.

Exchange-traded money market mutual fund account. Trading money in your investment institution provides liquidity. Your cash is pooled with other savers’ cash in mutual funds that invest in short-term government securities that pay interest without fees, similar to savings accounts.

Brokerage money market accounts are uninsured and regulated by the Securities and Exchange Commission (SEC). Another general advantage to brokerage money markets is their liquidity and accessibility. Cash is available next day in your account and is easily transferable electronically to external accounts.

Stock market. The stock market gives and takes. For the market to “give” profits, investors must “give” time to the market. This is not the same thing as “timing” the market. This refers to “time on the market”.

For short-term goals, the market may not be your best bet. The time horizon can quickly “catch up” through a market shock where your capital value drops dramatically.

In comparison, if the capital invested is for a long-term goal, there is time in the market to recover and rebuild capital.

Treasury I bonds. Americans are living in inflationary times and feeling the higher prices on their strollers, gas tanks, wallets and lifestyles. One positive is Treasury I bonds, which adjust their interest payment to changes in the Consumer Price Index-Urban (CPI-U).

When inflation is high, the I bond rate reflects the increase and is attractive. The current interest rate is about 9.62%, much higher than any savings account rate at a bank, credit union or brokerage.

There are caveats. You must buy directly from the government at Treasurydirect.gov, you can buy up to $10,000 per year (an additional $5,000 allowance if you pay with a tax refund), and you must hold the bond for 12 months.

These restrictions do not match short-term goals that have a horizon of less than 12 months, are larger than $10,000, and require liquidity and ease of access by users. I-bonds are most useful when a person has $10,000 outside of an emergency fund, a short-term goal, and the time to spare to cut inflation interest paid.

What should I do next?

Consider your needs, then review the savings vehicles described above to determine which one best meets your criteria.

The bottom line is that your needs are primary retention, low risk capacity and the ability to make a large purchase within 12 months. You also need liquid, accessible and transferable funds.

Your secondary goals are to earn interest and obtain insurance protection. You may consider an online bank or credit union outside of your primary institution if your funds exceed FDIC insurance limits.

Tips for growing and protecting your assets

  • If you have questions about your investment and retirement situation, a financial advisor can help. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisors at no cost to decide who is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

  • One type of FDIC-insured account is a certificate of deposit. Check out our list of the best CD prices in the country.

Photo: Madilyn Heinke, ©iStock.com/Extreme Media, ©iStock.com/shironosov

The post Ask an Advisor: Where Should I Keep Short-Term Savings? appeared first on SmartAsset Blog.

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