I know a lot of people these days who are barely managing to cover their expenses month after month. We can thank lingering inflation for that.
Hopefully, though, you're in a different situation and you have some spare cash at your disposal. If so, it's important to find the right home for it so it can grow nicely. Here are four options to consider right now.
1. A savings account
Building an emergency fund? Saving for a near-term goal, like a new phone or a vacation? If so, then a savings account is your best bet. It gives you access to your money without risking a penalty, and you can earn a nice amount of interest if you shop around for a great rate.
Of course, the one drawback with savings accounts is that your interest rate is subject to change. That's something to definitely be mindful of right now.
Interest rates on savings accounts and CDs are up right now following a string of Federal Reserve rate hikes in 2022 and 2023. But the Fed is expected to start cutting rates this year. Once that happens, savings accounts are apt to start paying less. So the sooner you get some money into a savings account, the more time you'll have to take advantage of today's great rates while they're still available.
2. A CD
A certificate of deposit (CD) is less flexible than a savings account because you're required to keep your money in the bank for the duration of the CD term. And withdrawing your cash early could cause you to lose several months of interest as a penalty.
But the benefit of opening a CD is that your interest rate is guaranteed throughout its term. We just talked about the potential for rate cuts in 2024. If you open a 12-month CD now at 5%, you're guaranteed to get that 5% through mid-2025. So if you're saving for a specific goal that's about a year out, you can confidently plan on getting $500 in interest to put toward it if you're opening a $10,000 CD.
But make sure any money you put into a CD is money you won't need before the CD matures. And if you recently had to tap your emergency fund, it pays to replenish that money before putting cash into a CD.
3. A brokerage account
Today's CD rates are pretty impressive. You know what's even more impressive? The stock market's average annual return, which has been 10% over the past 50 years.
If you have money you're saving for a far-off goal, like your toddler's college education, then a brokerage account may be a far better bet than a CD because you have the potential to earn a lot more money. In fact, let's say CD rates somehow hold steady so you're able to score 5% over the next decade. If so, you'll grow $10,000 into about $16,300.
With a brokerage account loaded with stocks, you might enjoy a 10% return on your $10,000 instead. That could leave you with about $26,000 in a decade's time instead of $16,300.
4. An IRA
You could use a regular brokerage account to save for retirement. But it pays to use an individual retirement account (IRA) for the tax savings involved.
Money you contribute to an IRA is pre-tax up to the allowable IRS limit. This year, that limit is $7,000 if you're under age 50, or $8,000 if you're 50 or older. Not only might you snag a similar return in an IRA to what you get in a brokerage account but you can also lower your 2024 tax bill substantially in the process.
Let's say you're in the 22% tax bracket based on your income and put $5,000 into an IRA in 2024. That amounts to $1,110 in tax savings for the year.
Of course, one thing you should know about IRAs is that you'll typically face a 10% early withdrawal penalty for taking out your money before reaching age 59 1/2. So if you want to invest with more flexibility, a brokerage account could be a better choice, even though you'll lose the tax break involved.
You have plenty of great options for putting your money to work this month. Think about your goals and timeline when making your choice, as well as how much flexibility you need if you're choosing between a savings account and a CD, or between a brokerage account and an IRA.
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