Ask An Advisor: Where Should I Stash Short-Term Savings?
I’m holding $300,000 in cash that I plan to put into a new home. With the market as it is, I’m putting off that purchase for six to nine months. I’m 66 years old, single and plan to retire within the next 12 months. What should I do with the cash until I purchase?
-Judi
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 are going to determine where you store your cash. And ultimately, understanding your unique needs and preferences, specifically your goals, will bring calm and clarity to your decision. You can use this tool to get matched with a financial advisor who might meet your needs.
How to Evaluate Short-Term Savings Vehicles
There are several factors to consider when eyeing short-term funds.
Term and type. Short-term investment and savings should be easily converted to cash within three to 12 months (or less) without losing principal value. They may have the opportunity for a small risk-free gain.
Risk. You want funds to retain the value of principal or earn a risk-free return.
Yes, there is an opportunity for short-term gains across various investment opportunities. But if you must assume risk for these gains, you may absorb the shock of sudden loss. Given your short time horizon, it is best to avoid unnecessary risk.
Access. Ease of access contributes to your storage decision. Short-term events require liquidity and expediency. It shouldn’t take more than a few days to liquidate and transfer cash to your goal. Nimble access requires a flexible financial institution location.
If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
Goal. 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 expense am I preparing for?
What positive outcome do I want to experience?
The answers to these questions will bring a sense of serenity to your process and decision.
What Are Your Options for Short-Term Savings?
Banks and credit unions.
Banks and credit unions have several advantages. FDIC insurance covers $250,000 of bank deposits per individual, per bank and account ownership. Depending on the 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 FDIC overview and calculator are available here. An NCUA calculator is here.
You can spread the deposit amounts across multiple institutions if your funds are too high to meet the FDIC insurance range at one institution. That strategy, however, adds a layer of personal management complexity.
Insurance is not the only benefit 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 quickest form of access, liquidity and transferability. Banks and credit unions tend to offer robust online platforms with electronic capabilities. Brokerage options will give the same.
Larger banks and credit unions offer multiservice platforms that allow clients to efficiently use their funds and access expertise across divisions such as mortgage, loans, brokerages, trusts and banking. If you think you’ll need any of these services during a short-term time horizon, banks and credit unions may look more appealing.
A potential drawback is low interest rates on your funds. Several reputable and insured online banking platforms, however, offer attractive savings account interest rates.
Brokerage money market mutual fund account. The brokerage money market at your investment institution offers liquidity. Your cash is grouped with other savers’ cash in mutual funds that invest in short-term government securities that pay interest rates net of fees, similar to savings accounts.
Brokerage money market accounts are not insured and are regulated by the Securities and Exchange Commission (SEC). Another general plus for brokerage money markets is their liquidity and access. Cash is available the next day in your account and is easily electronically transferable to external accounts.
Brokerage stock market. The stock market giveth and taketh. For the market to “give” gains, investors must “give” the market time. That’s not the same thing as “timing” the market. This refers to “time in” the market.
For short-term goals, the market may not be your best bet. The time horizon may “taketh” quickly through a market shock where your principal value dramatically declines.
Comparatively, if the invested funds are for a long-term goal, there is time in the market for a principal amount to recover and compound.
Treasury I Bonds. Americans are experiencing inflationary times and feeling the higher prices in their grocery carts, gas tanks, wallets and lifestyles. One upside is Treasury I Bonds, which adjust their interest rate payout to changes in the Consumer Price Index-Urban (CPI-U).
When the inflation rate is high, the interest rate on I Bonds reflects the increase and is attractive. The current rate is around 9.62%, much higher than any savings account rate at a bank, credit union or brokerage.
There are caveats. You must purchase directly from the government at Treasurydirect.gov, you can buy up to $10,000 annually (an allowance of an additional $5,000 if paying with a tax refund) and you must hold the bond for 12 months.
These limitations do not fit with short-term goals that have a horizon of fewer than 12 months, are more significant than $10,000, and require liquidity and ease of user access. I Bonds are most useful when a person has $10,000 outside of an emergency fund, a short-term goal and the spare time to clip the inflation interest paid.
What to 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 principal preservation, low-risk capacity and the ability to make a large purchase within 12 months. You also need liquid, accessible and transferrable funds.
Your secondary goals are to earn interest and achieve insurance protection. You may consider an online bank or credit union outside your primary institution if your funds exceed the FDIC insurance limits.
Tips for Growing and Protecting Your Assets
If you have questions specific to your investing and retirement situation, a financial advisor can help. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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 rates in the country.
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