Recently Michael Menzies of Pembroke Advisors was asked a question on Investopedia. “Where should I put my savings to accrue the most interest?” This is a question that we hear often from clients and people simply looking for a Financial Friend to answer their questions. Have you ever wondered where to put your hard-earned money to earn even more?
Here’s some advice from your very own, “Financial Friend”:
“First off, if you have Student loans, paying it off will provide you a big advantage going forward! It’s a smart call to look for ways to get your money working for you and not have it sitting in a low yield account.
The first thing I would do is take a second look at your budget.
Do you have 3-9 months of living expenses saved? Figure out what you need to live on (in the event of a job loss or other unexpected occurrence) then keep that amount in a savings account. Look at it as emergency/rainy day money. Although there are plenty of investments out there, protecting yourself from a surprise cash crunch is one of the best investments available. If your emergency fund “number” is considerably high, keep all your extra cash in savings. You may be able to get a higher savings rate from a credit union or smaller bank. This will prevent you from needing to lock up the funds in a CD.
Some financial institutions will offer high rates for savings and checking accounts up to a certain limit. Do some looking around. A quick google search for “savings account rates” will bring up some in the 2% rate area, with minimum account balances starting at $1. CD rates are about the same if you’re fine locking your funds up for a year or so.
Next, I suggest maxing out your employer 401(k) and personal IRA if possible.
If you want to have your retirement funding come straight out of your paychecks, up your contribution amount to your retirement account and spend down your savings to the level that matches your emergency fund needs. You will have to find the right balance of retirement account contribution and living expense needs to get this just right. 401(k)s and IRAs are designed to help your long-term savings and give you tax advantages. They can do a really good job at these tasks! Also, if you are concerned about longer term tax rates, you should consider having at least some of your retirement savings going toward a Roth IRA. You may be able to contribute to a Roth though your work 401(k) or do so via a personal/ individual account.
Lastly if you’re wondering about CD’s vs ETF’s for savings, they really are night and day investments.
Your CD’s are going to be insured. If you go with a longer maturity date you should be able to pick up extra interest. An ETF, conversely, is a basket of investments. Even if those investments are in bonds, the ETF will be subject to the ups and downs of the daily market movements. ETF’s are not guaranteed to stay at the price you “purchased” the investment like, a CD would be. There is nothing wrong with using an ETF for savings but there is just a lot more risk in an ETF vs. a CD. If guarantees are your main goal, I’d stick with a CD or savings account.”
We hope this helps answer some of your own questions about where to put your extra cash.