Episode Transcript
Saving for a house, a car, maybe that dream vacation? Putting your money to work earning money could help you reach that goal faster. This is Fidelity's Money Unscripted with Leanna Devinney, Fidelity Market Leader, and me, Ally Donnelly. In this episode, four short-term investment options for your cash.
Leanna, if this is me. If I'm a saver, I'm averse to risk, why should I consider something other than my traditional savings account?
We get this question so often, and it's really because your savings could be earning more. Just to put it in perspective, the average savings rate is about 0.39%. That's the annual percentage yield on a traditional bank savings account. So if you have $1,000 over five years, you've earned around $20.
Now, in some of these more competitive savings accounts, that yield, let's say it's 3%. That's now about $150. So just in the difference, that's over $100 in savings just by looking at the interest you're getting. This is money that could be earning more money.
OK. Hey, who doesn't like more money? I'm in. I'm in. If I'm thinking of moving my money out of a traditional savings account, what are the questions I should be asking myself?
It all starts with, what is the goal for this money? And also, what is the time frame and your risk tolerance? Those three questions are so important because we have so many investors we work with that say, I'm really risk averse, but I'm not going to touch this money for 10, 15, 20 years.
Well, we'd actually explore potentially a diversified portfolio for goals like that because we want to be able to combat inflation. We know the price of goods and services is on the rise. So it really comes down to the goals, your time horizon, and your risk tolerance.
But there is risk-reward to balance.
There is. And so that's why we want to really take a look at the wealth that we have and understand what are the roles and responsibilities for our accounts? So if we are able to go longer out and have a stronger risk tolerance, then with that risk will become potentially more growth and more reward. If it's lower risk and short term, then we're going to have lower risk but also lower reward.
If cash is my comfort language, how do I know if I might be sitting in too much?
And it is for so many. We hear cash is king, or I have the cash under my mattress approach. So we suggest having your emergency fund, which is three to six months of your expenses in a savings liquid accessible account. But we also talk about that sleep at night number. It may be far more than the three to six months of your expenses, or those that just prefer having more cash for their security. And that's where we can look at making sure you're getting the most out of your cash.
OK, let's dig into those short-term investment options. So we've got high-yield savings accounts, money market funds, and CDs and Treasury Bills. Let's start with the high-yield savings accounts.
So these are savings accounts that typically offer more interest than your traditional accounts. So they're more competitive on the interest rate. And because of that, there will be limitations, as an example, of how much you could withdraw monthly. The rate can fluctuate. But again, typically higher interest than your regular bank accounts.
Are they standard, so to speak? Is there one rate and they all take it? Or do you want to shop around?
You do want to shop around. And they're typically offered by online banks and credit unions. What's nice to know too is they're backed by FDIC insurance. So similar to banks, but they're FDIC covered.
But not as similar to banks in terms of access, right?
Correct. Because that-- again, because you're getting the higher rate there, they may put limitations to how much you can withdraw.
How about money market funds? Let's talk there.
So money markets are mutual funds, and a mutual fund has a basket of securities. In money markets, they are investing in low-risk, short-term debt securities. So they're high quality, and it's invested again in those low-risk debt securities.
But it's not a bank account.
It's not a bank account. It's a brokerage account. And so unlike a bank account, bank accounts have FDIC coverage. Mutual funds are covered by SIPC-- Securities Investment Protection Coverage.
So the money is still protected.
So the money is still protected.
Is that, again, a shop around kind of thing?
So there's so many different types of money market funds. And so depending on what your needs are, you can have uber short money market funds. You could have money markets that invest in municipal securities that are tax-free. But it's important to know that the interest fluctuates. It's not fixed, like the yield that you may see on your savings accounts or CDs, which we'll talk about. It does fluctuate.
Well, good segue. Certificates of deposit, CDs-- what do I need to know?
Yeah. So certificate of deposit-- so this comes with a term. So it can be anywhere from one month to 20 years. So it essentially is you are getting a fixed rate with the term that you're asking for.
So you could purchase, as an example, a three-month CD. So you're locking your money up for three months, and then in turn, getting more interest than, again, the traditional savings or money markets we had just discussed.
OK. And it's a fixed rate of interest.
It's a fixed rate of interest.
And is it insured?
It is also insured by FDIC insurance, just like bank accounts.
OK. Is it the same concept as with money markets, that you want to shop around?
Well, you want to take a look at the rate and make sure that you're getting a yield to, again, support having more savings. So many investors will actually do something called ladder CDs. So you might have a three-month CD, a six-month CD, a one-year CD. And that goes back to the different goals that you may have. If you know that you don't need the cash for a year or two years away but you want to keep it safe, a CD could be an excellent option for that.
So our fourth option, Treasury securities, or a lot of people know them as savings bonds.
Yeah. So there's bills, notes, and bonds-- all treasuries. And treasuries are backed by the full faith of the US government. So they are high-quality, high-credit debt obligations. So meaning similar to a CD, they come with a term.
So you may have a three-year Treasury. So you're putting your money in that investment, and you're waiting the term. And then you're getting back that rate and your principal.
OK. So it's a more conservative option.
It is.
So any limitations you want to go through?
So when you buy the securities, you're typically buying them at $1,000, $5,000, or $10,000. And then you're signing up for the term. And then at the end of your term, the government is giving you back your principal and interest.
OK. So these are all low-risk investment options that people can consider.
Exactly. And it's giving you more than, again, that traditional savings account.
So if I have listened to this podcast, I've watched this podcast, and I'm walking away with one thing, what do you want that to be?
So I'd want you to take a look at the cash and the short-term investments that you have, and know that you can earn more with just some subtle tweaks to the options that you have here, and it makes a really big difference over time.
Excellent. All right. Leanna Devinney, I thank you so much.
Thank you.
If you want to dig into more short-term investment options, check out our show notes or our website-- Fidelity.com/MoneyUnscripted. Be sure to like, follow, subscribe to the podcast, and we'll see you next time on Money Unscripted. It's your life. Get your money's worth.
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Investing involves risk, including risk of loss.
Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. The views and opinions expressed by the Fidelity speaker are his or her own as of the date of the recording and do not necessarily represent the views of Fidelity Investments or its affiliates. Any such views are subject to change at any time based on market or other conditions, and Fidelity disclaims any responsibility to update such views. These views should not be relied on as investment advice and, because investment decisions are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity product. Neither Fidelity nor the Fidelity speaker can be held responsible for any direct or incidental loss incurred by applying any of the information offered. Please consult your tax or financial advisor for additional information concerning your specific situation.
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You could lose money by investing in a money market fund. An investment in a money market fund is not a bank account and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Before investing, always read a money market fund’s prospectus for policies specific to that fund.
Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. Your ability to sell a CD on the secondary market is subject to market conditions. If your CD has a step rate, the interest rate may be higher or lower than prevailing market rates. The initial rate on a step-rate CD is not the yield to maturity. If your CD has a call provision, which many step-rate CDs do, the decision to call the CD is at the issuer's sole discretion. Also, if the issuer calls the CD, you may obtain a less favorable interest rate upon reinvestment of your funds. Fidelity makes no judgment as to the creditworthiness of the issuing institution.
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