Where should I put my savings to accrue the most interest?
I'm 26 years old, and have just finished off paying my student loans. I have an IRA at an institution and a 401(k) with my current employer, both of which I don't really contribute to, and around $16,000 in a savings account. I'm concerned that my savings are not accruing interest, and would like to move them into a high-yield account.
I'm comfortable putting $10,000 in an account that I can't touch for a few years (i.e. CDs), but would like to keep the remaining $6,000 in an account where the money is somewhat accessible in case of emergency, but also has a higher interest rate. Ideally, none of the money in my savings will go towards contributing to my retirement accounts (that's something I plan on doing more regularly with my paychecks).
Should I put $10,000 in CDs and the remaining $6,000 in a money market account? Or should I be doing something else completely, like putting the $10,000 in an ETF?
If this is traditional savings account you are looking for I would simply look at one of the online institutions offering very competitve rates. My favorites are live oak bank and synchrony to name a few. They are paying upwards of 1.8% plus on FDIC liquid savings. This keeps your money extremely liquid and doesn't tie it up like a CD might for comparable prices. As for an ETF you lose security investing there but if you are OK having a volatile experience certainly I think long term a non retirement investment account makes sense. For now stick with savings as I think it best meshed with what you seem to be describing.
Dear should I put $10,000 in CDs and the remaining $6,000 in a money market account?
Or should I be doing something else completely, like putting the $10,000 in an ETF?
Congratulations to you for paying off student loans! Congratulations for opening an IRA and a 401k account.
You have set the stage for a fine financial future by opening an IRA and a 401K account at your place of work. You express concern your savings account of $16,000 ia not accruing interest, and you would like to see your accounts yeild better returns.
A LIFE OF INVESTING
Whatever investment funds you create; long term funds with value and growth strategies or short term strategies with individual stock selections, a mindset of saving is key toward the attainment of financial independence. CD or Money Market accounts for a 26 year old are safe but will not yield returns you demand.
Your course of action at 26 years old is to start now, by carefully and cautiously choose a seasoned financial mentor, dare to seek knowledge, to plan, to read, learn and patiently construct a wealth plan of action which involves focus, commitment and dedication over time to the very best and most promising funds and individual stock selections. You must be comfortable with the plan. You must personally know and acknowledge the plan and not leave the plan to someone else. Because you are 26, time is on your side. Today, $10,000 invested in a high yielding ETF, Index and or Mutual Fund compound over thirty to fourty years will get you higher interest rate accrual than you would yield in a CD account by far. For an Index Account or ETF based on the S&P Sector the average annualized return over a ten year period is approximately 10% annualized. For a CD account or money market account far less. This is your choice.
Remember, this plan is fixed over time. You are blessed with lots of time on your side so do your home work and invest for yield. You may see market fluxuations over time but remember that all good stocks fluxuate, a natural phenomenon.
With what you have shared thus far, you have what it takes to reach financial indenpendence. Best of Luck.
BE FINANCIALLY SAFE FOR EMERGENCIES
Before you max out a strategy to become financially independent and save utilizing the IRA and the 401K accounts there are manditory steps to be taken to get you mentally, educationally and responsibly ready.
Develope a financial conscious mindset. Develop this mind set and be sturdy and firm in this quest.
An emergency fund will save you in case of emergencies; events unexpected, necessary and urgent expenses though events that must be planned for regardless. Differentiate this fund from any and all cost of living expenses. An emergency fund is separate from a source of money to save for a home, money for school, money for food and clothing. Such money must be allocated for emergencies only; things that happen in life, not expected but they happen unfortunately; sudden loss of income, sudden illness, something you must do for a family member or friend, a tragedy or disaster does happen. Unfortunate, No one else is going to plan for your emergencies but you.
26 is wonderfully young!, this is the perfect time to plan, save and pattern behavior. Formulate a mindset today, think about saving, investing, budgeting, emergency planning and long term budgeting which will include an emergency fund (inquisitive & focused mindset required). Force yourself now to visualize the long term. Start now to compete with yourself to create an expectation long term.
Make your Financial Plan visual. Write your plan on paper. Dedicate yourself to amass a one year safety net of funds. This long term process will result in a design involving trust to create a purpose of financial security about money and what it is worth long term for your future.
Dedicate yourself to have conversation(s), gain understanding of a strategy to save long term for emergencies. This mind set of mental strength should be strengthened now and ongoing into the future. Learn the financial mindsets of those you share time with make certain you collaborate with like minded individuals so that your plan is strengthened and the focus maintained. A financially fit lifestyle will make a difference in your lifestyle.
SECURE AN EMERGENCY FUND
An emergency fund must be safe and secure. Emergency money is not to be utilized whimsically, not "easily accessible". Safety and security is key. Place funds in an account not utilzed by you on a regular basis. If and when the time comes you marry, you must share immense trust, total belief and an oath of confidence to keep monies safe no matter what purchase either one of you "has to have". This oath is key for marital success.
A firm money mindset with a goal for financial independence and a desire for long term security in case of emergencies, key to success. Communication about funding emergencies, consistent discussions regarding your plans for Financial Independence and funding for emergencies must start now and continue through life. The Quantity of funds in an Emergency Fund should be equal to one year income. The amount of funds can vary however it is always best to have in reality more than less money available to you. Place funds in a simple checking or money market account. Money in either of these types of accounts will be free to remove funds quickly and easily versus accounts incurring a tax consequence if withdrawn early.
A first creative strategy to form an emergency fund is to be creative; develop strategies to form an emergency investment fund to include ways for you to work on projects, tasks you otherwise would have farmed out to other people. Sample tasks (cleaning house or washing cars) save money allowing the emergency fund to grow.
A second creative strategy is to perform side hustles (Uber, dog walking, caring for children, a barista at Starbucks). Opportunities are out there, pick a passion, make money, translate into a stream of income or an entrepreneurial ability you did not think possible. Make it fun, entrepreneurial, present tense!
A third strategy is to sell things clutter in your life. Be free from encumbrances. Make a strategy, a game.
See what you can do to rid yourself of clothes, books, belongings, make this an adventure. With the removal of items that were taking up space in your precious life comes time to think of other ways to be creative.
A forth strategy is budget, budget and budget. Youth are forming FI groups (Financial Independence). They are collectively and individually becoming frugal, more aware, vowing to get rid of debt, live simply, on a crusade to become free from expenses, free from debt. This takes discipline, mind control. In the end, great values about money are established, a life of freedom and control, a life knowing you have your emergencies covered.
PEACE OF MIND
Whatever strategy you take, the process of frugality and long term money management and control though difficult will assist you to gain greater peace of mind with each and every amount of money you are able to put away.
I stopped Starbucks and an expensive health club membership. I thought I needed both of these things, I was initially crushed to get rid of the expense. Now, after months, I do not miss these things. I replaced spending "habits" with an ability to save $1000 or more each and every month to put to savings. My partner's desire to save and not spend was actually what I needed. I wish we had spoken about money openly. Be open to change, be open to talk about money!
Plan your long term strategy, form your emergency fund. Take baby steps, reward yourself!
All the best to you,
Jan Attard, MBA, RIA
J. Oliver Maxwell, LLC
First, congratulations for paying off your student loans! And for having an IRA and a 404k. But that situation also helps frame what to do with your savings. Overall, you're in excellent shape for a 26 year old. You've paid off a big debt, and you've already got long-term retirement savings.
For that reason, I'd recommend putting $10,000 into an ETF. At this point in your life, you're young enough that you can afford to take on some risk in an effort to grow your money over the long-term. The ETF will help with that.
As to the remaining $6,000, I'd move that into an online savings account or money market. There are several well-know online banks that pay rates much higher than local banks. The accounts are liquid too, so you can move some over to checking if you have a need.
That strategy will give you both liquid savings, and greater long-term investing power.
Nice work paying off your student loans at 26, that will surely provide you a big advantage going forward! Sounds like you are really on the right track. It is a smart call to look for ways to get your money working for you and not have it just sitting around 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? If the $6,000 is 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 and 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 closer to $16,000 then keep it all in savings. You may be able to get a higher savings rate from a credit union or smaller bank without 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. Look around, I just did a quick search for “savings account rates” and found a few in the 2% rate area with minimum account balances starting at $1. CD rates are about the same if you lock your funds up for 1 year or so.
Next, I suggest maxing out your employer 401(k) and personal IRA if possible. I know you wrote that you want to have your retirement funding come from your paychecks, but you can do this by upping your contribution rate to your retirement account and spending 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 and they can do a 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 you asked about CD’s vs ETF’s for savings, they really are night and day investments. The 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 and 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. Based on how I read your question, it sounds like guarantees are your main goal. Hope that helps?
If you don't want to contribute any of the $10,000 toward long-range goals like retirement, your best bet is to open a money market account with an annual percentage yield that is close to the effective Federal Funds rate. CD's are not an attractive option right now as the Federal Reserve is likely going to continue boosting the Federal Funds rate toward 3%+ from 2-2.25% at present. That's why you've seen a lot banks promoting their CD products — they want to lock in cheap funding for themselves while they still can!