You work hard for your money, right? So when you find yourself with more of it than you need for bills, you should aim to put that extra cash to work.
Whether you’re looking for safety, steady returns, or potential growth, here are three great options to consider this August.
1. A Savings Account
The nice thing about a savings account is that you can access your money at any time. And your deposit is protected provided it’s in a FDIC-insured bank and doesn’t exceed $250,000.
In the past, savings account rates were incredibly stingy, so much so that the amount of interest you’d earn was negligible. But that’s not the case right now. Today, plenty of savings accounts have APYs in the 4.00% range.
If yours doesn’t, shop around for a bank that’s paying more generously—especially focusing on online banks. Online banks don’t have the same overhead expenses as physical banks, so they often offer much better rates.
Having a portion of your money in a savings account ensures liquidity and safety. You can easily access funds for emergencies or short-term needs without worrying about losing your principal. It’s a perfect starting point for any savings plan.
2. A Certificate of Deposit (CD)
The Federal Reserve made the decision during its late July meeting to hold interest rates steady. This means that today’s fantastic CD rates are likely to stick around a while longer.
If you like the idea of getting 5% back on your money, you may want to open a CD before rate cuts start happening. That could happen as soon as mid-September, which is when the Fed is next scheduled to meet.
CDs are time deposits offered by banks with fixed interest rates and fixed maturity dates. They are safe investments because they are FDIC-insured up to $250,000 per depositor, per bank. Before you put all of your money into a single CD, consider a laddering strategy.
This involves opening several CDs with staggered maturity dates so your money frees up at various intervals. A CD ladder could spare you from getting stuck with an early withdrawal penalty if you need some of your money unexpectedly.
For example, instead of putting $10,000 into a single 5-year CD, you might split that into five $2,000 CDs with maturities of 1, 2, 3, 4, and 5 years.
This way, you’ll have money becoming available each year, allowing you to reinvest at potentially higher rates or access cash without penalties.
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3. A Brokerage Account
The fact that some CDs are paying 5.00% today is pretty impressive. But what’s more impressive is the stock market’s historical return.
Over the past 50 years, the stock market has returned about 10% annually. And that makes a brokerage account a good place to put money you’re willing to invest.
A brokerage account allows you to buy and sell a variety of investments, including stocks, bonds, mutual funds, ETFs, and more. While the stock market can be very volatile, it offers the potential for significant growth over the long term.
It’s generally best to stay away from stocks if you expect to need your money within the next five to seven years.
But if you’re willing and able to invest for seven years or longer, then it pays to put some money into the stock market now, sit back, and let your balance grow.
To manage risk, consider diversifying your portfolio across various asset classes and sectors.
Investing in index funds or ETFs that track the performance of the broader market can also provide a solid foundation for your portfolio, offering diversification and lower fees compared to actively managed funds.
Combine Strategies for Optimal Financial Health
All of these options are great places to put your money this August, and they don’t need to be mutually exclusive. You could put a few hundred dollars into a savings account, open a $500 CD, and invest $500 into an investment portfolio.
Example Strategy
- Emergency Fund: Start by ensuring you have an emergency fund in a high-yield savings account. This should cover three to six months of living expenses and provide quick access to cash when needed.
- Short-Term Goals: For money that you may need in the next one to three years, consider CDs. The laddering strategy will provide periodic access to funds while earning a higher interest rate than a typical savings account.
- Long-Term Growth: For long-term goals like retirement or a child’s college fund, use a brokerage account to invest in stocks, bonds, and other securities. Over time, this strategy can yield higher returns, helping to grow your wealth significantly.
Benefits of Diversification
Spreading your money across different types of accounts and investments helps manage risk while taking advantage of various financial benefits. The flexibility of a savings account allows for easy access to funds.
The guaranteed returns of a CD provide stability and predictability. The potentially high returns of a brokerage account offer growth opportunities that can outpace inflation and build wealth over time.
Conclusion
Making smart financial decisions involves understanding your goals, risk tolerance, and time horizon. By using a combination of savings accounts, CDs, and brokerage accounts, you can create a balanced and diversified approach to managing your money.
This August, take the time to review your financial situation and consider how these options can help you achieve your financial goals.
With careful planning and a mix of strategies, you can ensure that your hard-earned money works as hard as you do.