If you have cash that you’re not sure what to do with in a traditional checking or savings account, your funds will actually become less valuable over time due to inflation. But a few interest-earning, short-term investments can keep it healthy while you find a more permanent use for it.
Here’s a quick example using $10,000:
Option one: Put it into a traditional savings account that earns 0.25% interest (if you’re lucky). After one year, you’ll have an “extra” $25, though inflation at 6% will more than erase that.
Option two: Open a high-yield savings account (HYSA) that pays 3.75% or more, and earn $375, keeping pace a bit more with inflation.
Option three: Open a CD that has a 5% APY, and earn $500 at the end of the term, offering better protection from inflation.
Option four: Buy a Series I Bond at 6.89%, earning $689 and more than keeping pace with inflation.
On the surface, option four seems to be the best, but if you may need access to the cash, then option two might be the better choice.
To help safeguard your money and potentially grow it in the short term, start with this crash course on the top five best places to save money right now. This includes: high-yield savings accounts (HYSAs), Certificate of Deposit accounts (CDs), money market funds, I Bonds, and treasuries.
Figuring out the best place to put your money depends on your financial goals, but read on for some guidelines to help with your decision. Here’s where to park cash right now:
5 Places to Park Cash
So what is the best place to park savings in the short term? Here are five solid options that can keep your cash reasonably safe and earn a respectable amount of interest. Most of them also keep your money readily available, so you can access it at will.
When Will You Need Access to the Cash?
One way to help you decide on the best place to park cash is to think about your timeline:
When you’ll need the cash
Options to consider
One year or less
HYSA, CD (if term is short), T-Bills, Money Market Fund
One to four years
HYSA, CD, T-Bills, Money Market Fund, T-Notes, Series I Bonds
Five years or more
Switch to a long-term investment strategy instead
If you’re looking for the safest place to put cash, a high-yield savings account is risk-free as long as it’s FDIC insured. If you’re saving with a credit union, National Credit Union Administration (NCUA) insurance provides the same level of protection. (See these websites to check if a bank or credit union is federally insured.)
Competitive HYSAs interest rates are in the 3.5% to 4.4% range. Thus, in one year, $10,000 will earn $350 to $440 in one of these accounts.
How They Work
HYSAs work just like traditional savings accounts, but they pay a higher interest rate than most traditional accounts.
Competitive rates available (with some paying over 4% as of April 2023)
No penalties on access to funds
No risk of losing any cash
Some other options may earn higher rates
How to Put Cash in a HYSA
To park cash in a HYSA, compare rates online, select an FDIC insured bank, and transfer funds into your new account.
Current CD rates are the most competitive they’ve been in several years as a result of rising interest rates. With higher rates, the best place to park money for one year could very well be a Certificate of Deposit (CD).
While the average one-year CD APY is 1.53% overall, some banks are offering up to 5%. So, in one year, $10,000 will earn $153 to as much as $500 in a CD.
How They Work
A CD is a deposit account you open up at a bank or credit union. Each CD has a fixed interest rate you’ll earn after a specific term, which is the length of time you must keep the money in the account. At the end of the term, the CD reaches maturity, and your interest is added to the principal amount. You must then withdraw your funds.
Guaranteed, predictable interest for the term of the CD
Different term lengths ranging from one month to 60 months
Usually have early withdrawal penalties
If you don’t take action when your CD matures, it may automatically roll into a new CD.
How to Put Cash in a CD
To park cash in a CD, compare rates online, select an FDIC insured bank, and transfer funds into your new CD.
Pro Tip: There are some special CDs marketed as “no-penalty” that allow you to earn interest and make an early withdrawal any time you like.
3. Money Market Funds
If you’re looking to invest cash now, a money market fund is a useful option. Money market funds can earn up to 5% interest and are a safe place to park cash short-term. So, in one year, you could earn up to $500 with a $10,000 investment in a money market fund.
How They Work
Money market funds are mutual funds held in safe investment vehicles like short-term Treasuries and U.S. government securities. The Securities and Exchange Commission (SEC) dictates that money market funds can only invest money in the highest credit-rated securities.
Stable investment option that’s typically not impacted by market volatility
Safe, temporary place to park cash as you consider other investments
Earnings can be lower than with other savings options
Not FDIC insured
Although it’s extremely unlikely, your investment could drop below the amount invested
Some money market funds charge fees
Pro Tip: Don’t confuse money market funds with money market accounts, which are a type of FDIC-insured savings account that earns interest.
How to Put Cash in a Money Market Fund
To stash your cash in a money market fund, contact a brokerage company or mutual fund firm.
4. Series I Bonds
If your main goal is to earn the highest interest rate, then I Bonds are the best place to save money right now.
I Bonds, tied to the inflation rate, are currently paying 6.89% (until April 30th). Therefore a $10,000 investment could earn $689 in a year in an I Bond.
How They Work
I Bond rates are based on the inflation rate, which is currently high. The U.S. Treasury sets I Bond rates twice a year. Accounts opened between now and April 30, 2023 will earn 6.89% for the life of the bond. A new rate will go into effect after that date and affect all I Bond purchases until October 30.
High interest rate when inflation is high
Guaranteed earnings with no risk
Money can’t be withdrawn for at least one year
Money taken out within five years is subject to a penalty equal to the last three months of interest
$10,000 per year purchase limit; you can buy an additional $5,000 directly from your tax refund (if applicable)
How to Put Cash in I Bonds
You can park your cash in I Bonds by visiting TreasuryDirect.gov.
Another place to put extra money right now is in treasuries. The biggest reason to use treasuries is that they’re backed by the full faith and credit of the U.S. government, making them a very safe place to park cash.
Current treasury rates are around 4.5%, so a $10,000 investment in a treasury would earn about $450 over a year’s time.
How They Work
Treasuries refer to Treasury Bills, Treasury Bonds, and Treasury Notes. These are government bonds classified based on how long they take to mature. T-Bills have the shortest terms (one year or less), followed by T-Notes (between two and 10 years), and finally, T-Bonds (30 years to maturity).
T-Bills are sold at a discounted price and pay the full amount at the maturity date. T-Notes and T-Bonds offer coupon (interest) payments twice per year until they mature.
Potential for higher interest than money market funds
Treasury yields are usually lower than other short-term options
How to Put Cash in Treasuries
You can purchase treasuries online at TreasuryDirect.gov or at a bank.
How to Choose the Best Place to Park Cash
Depending on your priorities, some types of savings may be a better choice for you than others. Before you decide where to park money for the short term, consider your personal risk tolerance and when you’ll need access to your funds.
If the thought of tying up your cash for three years might stress you out too much, then a HYSA would be a better option than a long-term CD.
Here are some suggestions on how you might use different short-term savings options:
Your Emergency Fund
If you’re just starting an emergency fund, a HYSA offers a good mix of earning potential, accessibility, and safety. But if you’ve already made progress (saving a few months worth of take-home pay), look into some higher-earning investments like very short-term CDs (three to six months) to optimize additional funds you won’t need for the next few months.
Saving for a Home or Wedding
If you’re planning to buy a house or get married in a few years, having less access to those funds is probably okay. In that case, I Bonds or CDs can be good places to park your money. You’ll earn a fixed amount of interest with no risk of losing your investment.
Waiting Out Market Volatility
Let’s say you have a lump sum of money that you want to invest for the long-term, but you’re not quite sure what you want to do just yet because the market is a bit unstable. You could park your cash in a safer, short-term investment like T-Notes, which are very secure while offering some return. A money market fund might also work well for you, thanks to its liquidity.
Saving for Non-Monthly Expenses
If you pay your taxes or insurance premiums quarterly or annually, or you want to set some cash aside all year for the next holiday season, a HYSA can create an added boost on top of your contributions, but can also keep the money available for when you need it.
Things to Consider When Stashing Cash
When you’re ready to park your money, think about these three main factors before you make a move.
Safety and Risk
A long-term investment has plenty of time to grow (and to recover if there’s a market downturn). But it’s not a good idea to take on too much risk with cash you might need in the near future. In other words, safeguarding your cash should be a top concern.
One way to keep your money safe is by selecting an account with FDIC coverage. This means the federal government protects up to $250,000 of your money in case something happens to the bank.
Deposit accounts like savings and CDs are FDIC insured as long as your bank is an FDIC member, but other short-term investment accounts like money market funds are not. That doesn’t necessarily mean you can’t park your cash in these other types of accounts, but just be aware that they carry a bit more risk.
Money Market Risks
With money market funds, one concept to know about is “breaking the buck.” Without getting into the complexities, what you need to know is that money market funds are usually stable and secure and very rarely lose money as long as their net asset value (NAV) doesn’t fall below $1.
On the rare occasion that it does, it’s referred to as breaking the buck, in which case your investment will lose principal. The last time this happened was during the 2008 financial crisis, but the government stepped in to insure the funds.
Government Backed Investments
Finally, if your main goal is safe investing, government-backed options like I Bonds and treasuries are extremely safe.
When choosing the best place to park savings, consider how much access you want to your cash. Some places like HYSAs offer anytime access, while others like CDs or I Series Bonds have penalties or fees for early withdrawal. If you’re willing to tie up your money for a set amount of time, you can sometimes earn a bigger payoff.
Compare the yield (the rate of return on your money) for the different places to park your cash above. Some accounts offer a fixed rate while others fluctuate. Generally, to earn the highest yield, you may have to take on a little more risk or give up some of your accessibility.
In a rising-interest-rate environment like the one we have now, it’s actually a good time to take advantage of short-term investments because yields are higher. These higher rates aren't more free money, but a way to mitigate your losses from inflation
How to Decide When to Hold Cash or Invest Long Term
There are a few key factors that can help you decide if you should park your cash somewhere temporarily, or put it in a long-term investment vehicle with more earning potential (and more risk).
For longer-term savings like retirement (unless you’ll retire within five years) or college savings (if your children are still young) you’ll have more growth potential when you invest in stocks and stock-based ETFs and mutual funds. You’ll also have more time to recover if the market dips.
Short-term investment strategies work best for more immediate financial goals, such as saving for something that will happen in the near future. Here are some good examples of when to park your money in no- or low-risk accounts:
An emergency fund: You may need to tap into your fund for unexpected expenses like car repairs or medical bills.
To cover an upcoming tax bill: If you’re self-employed and pay quarterly taxes or you may have to pay in at the end of the tax year, set aside some cash in a short-term account.
Goals like a car or home purchase or wedding in the near future: You wouldn’t want to risk losing your down payment or reception money, but if you can earn a little interest as you go, it can help boost your savings.
Invest Cash Now
Choosing a short-term investment account to park cash and generate extra earnings means you’re putting your money to work for you. Now that you understand the pros and cons of each short-term investment option, you can decide which ones align best with your financial priorities.
If you’re torn over the best way to park money for short term needs, the good news is you don’t have to choose just one. You can use any or all of these funds simultaneously, especially if you have multiple financial goals.
So — go ahead and keep a HYSA for your emergency fund, open a competitive CD to help boost savings for a planned home renovation, and purchase some I Bonds simply to take advantage of the high inflation rate.
With Monarch Money helping you track and manage your budget, you’ll be able to identify those all-important disposable income dollars so you can invest wisely and accelerate your savings goals.