You may have heard “cash is king,” and while that may not necessarily be true when it comes to investing, cash savings are still a very important part of a retirement savings strategy. They’re also considered safer than investments like stocks or real estate.
Simply put, cash savings are exactly what they sound like: Your hard-earned money stored in a highly liquid and accessible form. Several tools are available to store these funds, and none of them involve piggy banks or the undersides of mattresses.
- The first and most obvious ways to conserve cash are in checking and savings accounts. These services come with almost any basic bank account, and provide a safe place to keep your money while still having easy access to it. Savings accounts usually exist in three types: A basic bank account with low interest; a high-yield savings account, which usually has some limitations; and an online savings account.
- Money market accounts are similar to savings accounts but offer higher rates of interest in exchange for limited withdrawals and a larger minimum balance.
- CDs, or Certificates of Deposit, typically come with higher interest rates provided you don’t touch the money for a period of time stipulated by the bank. The end of this term is what institutions refer to as the maturity date.
How do cash savings work?
With cash savings, a bank is essentially paying you to loan out your money. Most banks are insured by the Federal Deposit Insurance Corporation (FDIC), meaning your money is guaranteed to be there, when you need it up to $250,000.
Benefits and risks of cash savings
Savings accounts are generally superior to checking accounts in that they offer slightly higher interest rates or APYs (annual percentage yields). Some checking accounts do occasionally provide a small interest rate or cash-back incentives for using debit cards at certain vendors.
However, the disadvantage of savings is that they don’t offer the convenience of frequent withdrawals that checking accounts do. Also, when interest rates are low, those benefits can be offset by annual inflation increases.
That’s why you can often earn higher returns on your savings through other retirement savings products. Traditionally, stocks and mutual funds provide potentially higher returns, but with more risk.
Money market accounts offer higher, competitive interest rates and typically require an opening balance of at least $1,000. Banks can charge a fee (typically around $5) if you don’t maintain that minimum. They can also limit your number of withdrawals and levy a fee (around $5-$10) for each one you make in excess of the monthly maximum (usually six).
Cash savings considerations
Because they’re insured, cash savings are a safe and foolproof way to keep money on hand for short-term everyday expenses. The Federal Open Market Committee, a 12-member national banking group, sets interest rates, so it’s smart to keep an eye on their announcements to know when to get the best rate for your deposit. Banks are competitive, so shop around for the highest rates you can find.