In 2023, Americans saved an average of about $6,138, according to New York Life. If you also have extra money at your disposal this year, you may be wondering where to put it to keep it safe and help it grow. And in that regard, you have choices. Here are three of the best homes you might find for your money today.
1. A savings account
If you want to set aside extra funds for emergency expenses, or if you’re putting money away for a short-term goal, then a savings account is the place you want to turn to. But it especially pays to put money into a savings account right now.
The Federal Reserve spent a good part of 2022 and 2023 raising interest rates to help slow the pace of inflation. And now, banks are paying generously as a result.
These days, you can earn upward of 4% interest in a savings account, especially if you opt for an online bank, as opposed to a brick-and-mortar one. And the best part? There’s no commitment involved. You can remove your money at any time as you please. But while your cash is in the bank, you get to earn more.
2. A CD
It’s true that savings accounts are paying generously these days, and that they require no commitment. With a CD, you do need to make more of a commitment because you’re tying up your money for a preset term. And if you withdraw your money before your CD comes due, you risk a penalty, the amount of which will depend on your bank and the number of months your CD is for.
Still, the benefit of going the CD route is that CD rates, like savings account rates, are high right now. While a savings account might give you 4% on your money, a CD might give you more like 5%. And unlike a savings account, where your rate could fluctuate, with a CD, you’re promised a given rate for the duration of the term you sign up for.
In fact, you may want to open a longer-term CD now — such as a CD with a term of 48 or 60 months. If you go that route, you may not get as high an interest rate as you will with a shorter-term CD — for example, one that covers 12 months or less.
But remember, the CD rates we’re seeing today may not be around beyond 2024 since interest rates are expected to fall in the not-too-distant future. So if you’re saving for a longer-term goal, a 48- or 60-month CD could be a good home for your money.
3. An IRA
A longer-term CD might benefit you now if you’re saving for a goal that’s somewhat far off. But even though today’s CD rates are quite impressive, they still pale in comparison to the stock market’s average annual return of 10% over the past 50 years. If you have money you really want to earmark for a far-off goal, like retirement, then an IRA is a good bet, as that account will allow you to invest in stocks.
Let’s say you have $6,000 you’re looking to use in the future. With a CD paying 4% over the next 25 years (which is unlikely because rates probably won’t stay that high), your $10,000 will be worth about $16,000. With a stock portfolio paying 10%, you’re looking at more like $65,000.
Also, the nice thing about traditional IRAs is that they shield some of your income from taxes. If you’re putting money into a CD or saving account separately, the interest you earn there will add to your tax burden. So it could be a good idea to offset that by contributing some funds to an IRA.
Clearly, you have choices when putting your money to good use. Weigh these three carefully to see what best aligns with your goals.
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