Setting aside a nest egg for emergencies or long-term goals like home improvements can be a great way to help build financial discipline, but many investments bring risks to the table that make them less than ideal for situations where you might need to access the money at a particular time. It’s hard to predict when stocks or cryptocurrency will be ripe for cashing out, which can pose a problem if you value liquidity.
Diversify Beyond Retirement Accounts
Instruments like 401ks and IRAs, for example, offer a relatively high yield and options to invest in stocks, but they also have stiff penalties for withdrawals. While they generally perform well and you should invest in them, you also need some options that give you higher returns than a savings account and better access than a retirement account.
Most people look to three main products for growing their money when they know they will need to at least have the option to withdraw it at a certain time. Share certificates, certificates of deposit, and money market accounts are all very popular, and each has its advantages and disadvantages. If you’re looking for a long-term investment, U.S. Treasury bonds are also low-risk investment vehicles to consider.
Money Market Basics
Most money market accounts work similarly to a savings account. That means you can withdraw from them more or less at will. They offer higher interest rates than savings accounts, though. Some banks and credit unions will offer as much as double their savings account interest on a money market, but there are a few strings attached.
Most of these accounts have a minimum balance that needs to be maintained. Penalties for withdrawing below that minimum range from monthly account maintenance fees to a full downgrade to the institution’s standard savings account at whatever its current interest rate happens to be. It is also common for money markets to be tiered, with higher interest rates as your average monthly balance reaches certain thresholds.
Certificates of Deposit and Share Certificates
When you are pretty sure you will not need to withdraw money at a moment’s notice, CD certificates and share certificates are a great option. The biggest difference between the two is that the former is offered by banks, where the latter is the term for the instrument when you buy one through a credit union. Either way, they have very predictable features.
Both of them offer interest rates that are higher than savings accounts. Most of the time the rates are still below money market accounts, but not always. That is because you choose a term length for the certificate when you buy one. At the end of the term, it matures and collects the interest in the certificate’s terms.
At that point, you can cash out, roll it into a savings account, or invest in another certificate. Most institutions offer terms ranging from six months to two years, usually at six-month increments between the two. If a CD or share certificate is terminated early, the penalty is typically forfeiture of the interest.
Bonds From the United States Government
The last low-risk investment option is Treasury bonds. Often, these instruments have terms of ten years or more, which makes them a good choice for predictable yields, but not for liquidity. Unlike certificates of deposit, you usually cannot just cash out early if there is an emergency. In some cases, you might be able to sell the bond to someone else, but not always.
As you build wealth, it is a good idea to use all of these tools at once alongside higher-risk investments so you can grow your money quickly while still having predictable access to at least part of your portfolio. That way, you can create a stable set of emergency funds while also saving for long-term projects and retirement.