Does anyone else store extra money in savings?
I've been looking for options for money that I've socked away in my Savings Account. I was told after I've saved 3-6 months worth of income, any dollar more in my savings loses money. (yuck) I asked several of my friends the same question and they at least admitted to having the same problem!
So in case others have the same issue, here's what I found. Def not an exhaustive list but was enough for me to make a move.
CD -- super safe, makes 1-2%. Better than savings, although not by much. Penalty for taking your money out early so make sure you don't need the $$ anytime soon.
Earn Account -- supported by Treasury Department, makes 3%. I like the fact it supports local and women-led businesses. You determine when you want to take $$ out.
Ally Savings Account -- online bank that offers 1%. Can access your money without issue by transferring it to another account.
Good luck and let me know if you find other options!
Parent Replies
Any dollar money more in savings loses money because of inflation, which historically runs around 2-3% per year. Unfortunately, none of the options you listed are actually better than inflation, and would not be a good place to store your money in the long-term. (The math is simple, just take the interest rate and subtract inflation to get the "real" interest rate. So a 1% ally savings account means your money would have -1% to -2% real interest per year, so it would actually still lose value every year.)
Best two questions to ask: what is this extra money used for? When do you need it? That will determine what kind of investment you need. If you just want to save the money and you don't need it for more than five years, put it into a mutual fund (preferably a passive index fund). Stock market returns average about 9% historically; after inflation, this means your money doubles almost every ten years, which is hard to beat. Unfortunately, in any given year the stock market can do crazy things, which is why this is some place to park your money only if you don't need it soon (also, many mutual funds have restrictions on withdrawals). If you need the money for a down payment within a few years, then you should pick something like a high-interest savings account (or a CD if you are absolutely sure you only will need it after a set number of years). Sure, you may still lose some value in your money, but over just a few years it won't affect much, you'll be protected from a bad year on the stock market (which is the most important thing), and you'll be able to withdraw when you need it.
I have this exact problem and have been wondering what to do for months. Thanks for posting!
If this is truly money that you do not expect to need to use, I'd opt for an index stock or bond fund from Vanguard or TIAA. You have to be able to ride out the inevitable ups and downs and accept that the amount may go down as well as up, but you'll be ahead of the game in the long run.
Provident Credit Union, of which membership is open to anyone residing in the Bay Area, has a super checking account that currently pays 2.01%. It has a few requirements such as one direct deposit per month...but it's unbeatable for its rate and convenience and customer service. Plus it's a cooperative-- we members are getting the interest and benefits not the big banks.
If you have more than $3k, I would strongly recommend opening an account with Vanguard and investing in one of their low-cost index funds. It's not risk free, but should yield a greater return long-term.
Do you contribute the max possible to tax-advantaged accounts such as 401(k), or IRA? If not, you may want to start increasing your contributions to those options now that you have a nice savings buffer.
Why wouldn't you invest in mutual funds?