You have a lot of choices for where to park your cash, but you shouldn't just toss it in the first account you come across. Take your time and find the right place to keep your money by focusing on the following factors:
Here are some of the major account types you may want to consider when deciding where to park your cash.
Checking accounts are designed for spending. They keep your money easily accessible and most include check-writing capabilities and debit cards as well as online access to your cash. If you choose a brick-and-mortar bank or credit union, you can also visit a branch to deposit or withdraw money.
Checking accounts don't usually offer interest and when they do, it's not as high as what you can get with most of the other account types listed here. Some also charge fees, which could end up costing you money if you're not able to waive them.
Money you put in a checking account is backed by the Federal Deposit Insurance Corporation (FDIC), so it's protected up to $250,000 per person per bank in the event of bank failure.
A savings account is designed to hold money you plan to spend within the next few years or for your emergency fund. You're usually limited to six free withdrawals per month (per Regulation D) and you probably won't get an ATM card or check-writing capabilities, but you can earn interest on your account.
Just as with checking account funds, cash you keep in a savings account is backed by the FDIC. This makes it a safer bet than investing your money for those who are worried about losing it.
Account minimums are usually low, but if you choose a brick-and-mortar bank, your interest rate will likely be low as well. However, some offer better rates to customers who keep more cash in their account or those who open multiple accounts with the bank.
High-yield bank accounts are usually offered by online banks. They don't have branches to maintain, so they can offer customers better rates and fewer fees. Most online banks offer checking and savings accounts, and these are backed by the FDIC just like brick-and-mortar bank accounts.
Accessing cash can be a bit of a pain if your account doesn't include an ATM card and a fee-free ATM network. You'll have to transfer funds between accounts and possibly between banks, but it is doable.
Money market accounts are a hybrid between checking and savings accounts. They usually offer the higher rates of savings accounts with more options for accessing your cash like checking accounts. But you're still limited to six free withdrawals per month.
Money market accounts are a little less common than checking or savings accounts and they often have higher minimum deposit requirements to open the account and avoid fees. But if you can meet these requirements, you'll earn a decent interest rate while still having the security of FDIC insurance.
Money market funds are offered by brokers and mutual fund companies rather than by banks. These funds invest in highly liquid securities like certificates of deposit (CDs) and government securities, discussed below.
Your money isn't FDIC insured if you choose a money market fund, but you'll still have quick access to your cash when you need it via an ATM card or a check. You may also be able to earn a greater return on your savings than you could with any of the accounts listed above.
Certificates of deposit (CDs) are another type of FDIC-insured bank account that offers a high annual percentage yield (APY) in exchange for limited access to your funds. CDs have terms, usually ranging from about six months to five years, though you can find longer or shorter options. When you open one, you're agreeing not to touch your cash for the predetermined amount of time in exchange for a high interest rate.
If you withdraw your funds before the maturity date, you'll pay a penalty. The amount of this penalty depends on your CD and when you make the withdrawal. That makes these accounts a poor choice for anyone who thinks they may have to cash out early.
"Treasuries" are backed by the full faith and credit of the U.S. government. Treasury bills typically mature in less than a year while Treasury notes often take between two and 10 years to mature. They're considered extremely safe and you can buy them commission-free online. They're also exempt from state and local taxes.
But you may be able to earn a higher return with some of the other options listed here. Also, like most bonds, if you need to withdraw your funds before the maturity date, you may not get your full investment back.
I Bonds are a special type of bond that's designed to protect your investment against inflation. You can purchase them in increments ranging from $50 to $10,000 and buy them directly online without paying a commission fee.
An I Bond is also exempt from state and local taxes and might be tax-free if you use the money for post-secondary education expenses. If you do owe taxes on your earnings, you may defer them for up to 30 years. But you must make sure to hold your I Bond for at least five years. Selling it earlier results in a penalty.
Municipal bonds are issued by state and local governments. Like all bonds, they're essentially debt. The governments take this money to use on public works and pay you back with interest over time. While they're not on quite the same level as U.S. government bonds, municipal bonds are still considered pretty safe and they're exempt from federal taxes and possibly state and local taxes as well.
Unlike U.S. government securities, municipal bonds may have a commission fee. You also may not earn as much with these as you could with some of the other options on this list, especially if you sell your bond before its maturity date.
Corporate bonds are debts issued by companies. Bonds from more creditworthy companies are generally considered safer, but you may not earn as large of a return. Meanwhile, bonds from less creditworthy companies could earn you bigger returns, though there's a greater risk of loss.
You'll likely have to pay a commission to purchase a corporate bond, and selling yours early could cost you money, even if the company pays back what it owes when it's supposed to.
Bond funds are mutual funds that pool the money of many investors to purchase a variety of bonds. They help you quickly diversify your investments, which can better protect you against loss. But they're a little less predictable than some of the other investments listed here because the share price and yield can fluctuate over time.
Mutual funds also charge an annual fee known as an expense ratio, which will take up some of your profits. You may have to pay a commission fee, known as a load, as well.
You're free to spread your cash out over several of the accounts detailed above if there are a few types that appeal to you. Remember, what's right for you now may not be what's right for you later on, so periodically review where to park your cash and make changes as necessary. You'll also want to routinely compare the different fees and returns you can get from different types of bank accounts or investments, as these can change over time and may affect which one works best for you.
Many people are missing out on guaranteed returns as their money languishes in a big bank savings account earning next to no interest. The Ascent's top savings account picks can earn you more than 10x the national average savings account rate.
The Ascent's beginner's guide to banking covers the essentials of selecting the right bank account so you can confidently take action.
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