Currently, I'm depositing my reserve funds into a generic savings account. But I'm wondering if there is a better low-risk option for that money, which is just sitting there for a rainy day, that would help it grow on its own over time and allow me to withdraw funds as needed.
Thanks for any and all advice!
A savings would yield a fraction of a percent. I would reccomend putting into index funds. Also consider how soon you need the money as well
Online CD one can get 1.7% annual interest anytime withdraw. Keep in mind that rate will probably change to 2.25% by year end. 1 year CD is another safe heaven.... Vanguard VMMXX fund which is as high interest as one can get. Check for redemption fee which can be costly....
Hi @Patrick Gault ,
A lot of this depends on both on your time frame (for your first withdrawal) and how you define "low risk".
If you are looking at needing the money in less than a year, the only "low risk" option that I am aware of is keeping it in cash. By that, I mean a savings account. A number of the online banks are offering interest at around 1.65% to 1.7% which is pretty good, and federally insured.
If you are willing to hold onto something for a few years, I would consider Treasury bonds. They will not make you a lot of money, but they are a very safe asset and currently pay a better interest rate. I believe its currently around 3%; of course the tax benefits of this investment is nice as well. However, most likely interest rates will be going up significantly, so if you sell the bond you may be forced to sell at a discount.
If you are willing to hold onto an investment for at least 5 years (longer is ideal) and are comfortable with volatility, index funds might be a good choice for you. This is a riskier investment than the other two I mentioned, but with a fund that covers a broad swath of the market the risk is reduced through diversification. There will be volatility, so if you are looking for only a short-term placed to park you money this is not a good choice for you. If you are looking for a long-term option, it would probably do the best for you in terms of total returns.
Definitely agree with @Brian Schmelzlen . Online Savings are great for short-term (3-5 day bank transfers). I use Ally (not paid to say this) and lately with the way rates have been moving, they've increased the rate for me at least once a month since January (1.65%). Ally's goal is to pay the highest rate in the industry, I believe.
Thanks everybody for the great info.
How is the interest taxed for accounts like this? Can I deduct anything special against it or is it treated like my normal W2 income?
You could also look into money market accounts. That is where I plan on putting my reserves. Good luck!
I have an online savings account with discover bank. 2.1% right now! Nothing to get thrilled about, but it’s way better then typical savings rates.
Barclay's and Ally are above 2% right now.