#persoalfinance

Each dollar of yours is like an employee. If you let them sit around and do nothing, it will hurt your business. If you “employ” them, which means to put to work or make use of, it will benefit your company. Is every dollar of yours benefiting your personal finances or are there lazy dollars sitting around doing nothing for you?

Below I’m going to show you 5 places to stash your cash based on goals that are one to five years away to get the maximum value from each of your green employees.

Depending on your financial goals, where you stash your cash will determine if you reach those goals. If you plan to spend the money within one year, be safe with it. If you plan to spend it in one to five years, go for a higher rate of return.

Where I save my money depends on the goal. I’m willing to invest my savings for something like a vacation fund because the cost of a vacation varies and when we go is flexible. On the other hand, if I’m going to put money down on a house soon I don’t want to lose any of that money.

SHORT-TERM VS. LONG-TERM GOALS

Let’s use three examples of goals:

Saving for a vacation

A down payment on a house

And building an emergency fund

Using these three examples, where is the best place to stash your cash if your goal is one to five years out for each of these?

When it comes to long-term goals like saving for retirement I would look at different options than what is mentioned below.

1. CASH

Some people suggest you keep cash somewhere in your house. Other than the internet disappearing or banks seizing to exist, it doesn’t do you good to have cash under your mattress because those are lazy dollars that need to wake up!

Some people like cash because it’s tangible. If you’re new to budgeting or teaching your kids to manage money, using cash is powerful!

Read: The Jars Money Management System

Cash is good for teaching. It’s a powerful tool because you can hold it and feel it. And let’s be honest who doesn’t love holding a wad of cash! We live in a world where money is more of an abstract idea than a physical object.

Cash is good for changing behavior. I used cash for years as a teenager to manage my money. Now, I don’t have more than $5 – $10 of cash on me unless I am traveling (No thief would be happy to rob me).

If you struggle with spending, cash is harder to spend than swiping a card. According to a study, people spend 17% more money when using a credit card than if they were to use cash.

Other than for behavior change or teaching purposes, I think you’re better off doing something else with your dollars in place of using cash.

Read: Don’t Like Using Cash to Manage Your Money? Try This…

2. SAVINGS ACCOUNT

My bank is my central hub for my money and everything else flows from it. This allows me to transfer money easily to savings, investments or paying bills. The best part is I can track exactly where I spend my money unlike using cash.

Some people don’t like having their money sit in a savings account because most banks pay an interest rate of 0.000Nothing%. I don’t blame them with the average interest rate on savings being 0.06%. But, having money in your savings accounts could be good for a few reasons:

Liquidity – It’s easy to get to when you need it

Security – Your money is FDIC insured up to $250,000

Safety – Essentially no risk (except for one major risk below)

Although the peace of mind of having your money in a savings account is nice, you run a risk of leaving it there. That risk is called purchasing power risk. $100 today will buy you less in 10 years due to inflation. Inflation can fall between 2-4% per year. So if you’re not earning at least enough interest to keep up with inflation, the value of your dollar decreases over time. It’s not a good idea to leave too much money in a savings account.

3. HIGH-YIELD ONLINE SAVINGS ACCOUNT

Many online banks now are willing to pay a higher interest rate to keep up with inflation. Online banks have lower overhead costs because they don’t have to pay for physical branches. That means they can pass the savings to the consumer by offering higher rates. The interest rate is important when you’re looking for a place to keep your money, but it’s not the most important thing. Other things to consider are:

Your savings rate

The credibility of the bank

Terms and conditions

One of the downsides of a high-yield savings account is not having all of your money in one place. If you need to transfer money into your primary bank quickly it could take a couple of days. Don’t put your everyday spending money in one of these accounts. I’ve looked into savings accounts that offer up to 3% APY (Annual Percentage Yield) which is changing all the time. Let me know if you know of any good ones!

BANKS VS. CREDIT UNIONS

When deciding where to stash your cash should you use a bank or a credit union? There are pros and cons to both.

Banks are for-profit enterprises, while credit unions are nonprofits. Credit unions also offer higher interest rates on deposits, lower rates on loans and lower fees.

WHY CHOOSE A BANK?

More branches in the region or across the country

Typically quicker to roll out new apps and new tech

WHY CHOOSE A CREDIT UNION?

Typically has lower fees and higher interest rates on deposits

Emphasis on customer service

I go for the best of both worlds and use USAA for my personal banking and Wells Fargo for my business banking. I’m happy with USAA and would recommend them to anyone. Think of it as an online credit union with low fees, great customer service and always at the front of technology. They were the first bank to introduce biometric sign in. I was using my face to log in to my account back in 2014.

Although I’m happy with USAA, I’m always looking for something better.

4. MONEY MARKET ACCOUNTS (MMA)

Money market accounts are federally insured short-term interest-bearing instruments that generate a variable yield while preserving principal. They tend to have interest rates that are higher than savings accounts, but they often require a higher minimum deposit.

The difference between a savings account and an MMA is what the bank can do with your money. The bank is restricted in how they can loan your money. With an MMA the bank may put your money in a CD, low-risk mutual fund or government securities. Many people have an MMA already and don’t realize it. That’s because in your investment account there is typically cash waiting to be invested that is stored in an MMA. I wouldn’t be too concerned about these accounts for your goals.

5. CERTIFICATE OF DEPOSIT (CD)

A certificate of deposit (CD) acts as a savings account and has a fixed interest rate. It also has a fixed date of withdrawal, known as the maturity date. I call these certificates depression:). If you want to invest your money for the long run the interest rate is measly. Although it’s higher than a typical savings account or money market account your money is going to be locked up for a period of time. For example, at my local credit union the terms of a CD are:

2.00% 1-year CD

2.50% 4-year CD

3.15% 5-year CD

I don’t use CDs anymore because I had a bad experience. I deposited $5,000 into a 2.5 year CD back when I was 19 and made $50 in interest after two years. My car broke down and I needed to access the money early and paid a $25 fee. Then, I had to pay taxes on that $50 which was $7.50. So my $50 return went to $17.50 which is a 0.0035% return. Basically the same as if I would have left it in the bank.

I could have found a better CD and I could not have pulled it out early but either way, I’m not a fan of CDs. I want control over my money and I’m willing to take more risk if I’m going to be saving that money for a few years.

However, CDs seem to fit some people very well and there are many reasons why they may make sense for you. Something that seems to be effective with CDs is called a CD ladder. You open multiple CDs to have access to your money at different times in the future without locking all of your money into one long-term account. I still think there is better places to stash your cash.

BOTTOM LINE

To be honest I don’t use high-yield savings accounts (I may if I find a good one), money market accounts or CDs. I use traditional savings accounts and any other amount of money above that I invest it.

Hopefully, you’ll be able to take away information from this article and apply it to your situation. I didn’t talk about investing. If you would like to read an article I wrote about that:

Read: I Don’t Know How to Invest and I’m Scared I’ll Make a Mistake

These are simply a few ways you can employ your dollars and stash your cash. But, more important than getting the highest interest on your savings is how much money you save.

If you’re having trouble saving money I recommend you set it up automatically. You can set this up with your bank or you could use a tool like Qapital or Digit to do it automatically for you. They don’t have a high APY but they can help you consistently save. I love personal finance technology that helps change behavior!