This post is by our regular contributor, Erin.
In the personal finance world, it goes without saying we love to talk about money. How to earn more of it, keep more of it, and make it work for us.
Rarely do we discuss where we keep our money.
You might be inclined to say “my wallet” or “my bank account,” and those are pretty standard answers. However, your money isn’t earning much interest in those accounts.
You can get more bang for your buck elsewhere, depending on the timeline of your financial goals.
Let’s go over where you can keep your money (hint: not under your mattress!) and get the most out of it.
Bank Accounts
Sadly, keeping money in a regular old savings account doesn’t do much for you these days. Even high-yield savings accounts are paltry. However, something is better than nothing, right? And you want some liquidity in case you have an emergency.
I recommend keeping your money for short-term savings goals and your emergency fund in a savings account – one with a higher APY that doesn’t require a huge minimum balance and also doesn’t have any fees. You shouldn’t have to pay a bank to hold your money for you!
For your expenses, have a checking account and keep it topped off so you don’t have to worry about overdraft fees. It’s that simple.
Online banks have some of the best rates around, and they’re typically free of maintenance fees.
Do you have your own business? Don’t forget to open business checking and savings accounts. It makes your life much easier come tax time.
Fixed Income Products
Have a couple of medium-term to long-term goals you need to save for? Consider CDs or money market accounts, as each offers higher interest rates when compared to a regular savings account.
You’re required to keep your money in a CD for a set amount of time, so make sure you’re not going to need it before then, or you’ll face a penalty when withdrawing the funds.
Money market accounts may not be worth the higher minimum balance they usually require. They have slightly better interest rates than regular savings accounts. In addition, they function as a hybrid checking/savings account, so you can write a limited amount of checks a month from it.
ETFs, bonds, and mutual funds can also be included here, but they’re much riskier than CDs or Money Market accounts. You have to be able to manage that risk, and I wouldn’t recommend it if you’re a beginner, or don’t have a financial planner to help you.
Retirement Savings Accounts
Your 401(k) is probably the first thing that comes to mind here (or a 403(b) if you work in the nonprofit sector). If you have a good employer match, you should definitely take advantage of it and contribute as much as you possibly can.
There is one drawback, though – you need to look at your investment options. Not all 401(k) plans are created equal. If there’s a history of sub-par returns, or if it has high fees, it’s worth looking into other alternatives. At the very least, speak with your plan manager about the limited investment options available.
Next, you’ll want to focus on funding an IRA – whether it’s a Roth or Traditional. Your money grows tax-free in a Roth account, and tax-deferred in a Traditional account. You’ll face a hefty 10% penalty if you withdraw funds before you’re 59 1/2, unless you’re covered under an exception.
IRAs are great for young adults, especially for those who are freelancers and don’t have access to a 401(k). If you’re self-employed, look into a Solo 401(k), SEP IRA, or Simple IRA.
If you’ve managed to max out your 401(k) and IRA – congratulations! You’ll probably want to talk to an advisor about your next moves. Investing in the market requires realistic expectations and you should be knowledgeable about what you’re investing in. Generally, ETFs, index funds, and mutual funds are “safe” routes to go if you don’t want to invest in individual stocks.
Afraid of investing? Don’t be! Your money can’t outpace inflation when it’s kept out of the market. The only way to capitalize on growth is to invest it somehow.
A Few Other Ideas
You can also choose to keep your money in real estate, if you’re interested in becoming a landlord and earning rental income.
Otherwise, an HSA is a good idea for those who have one. You can use it as a medical emergency fund, and you can invest excess funds while lowering your taxable income.
There are a ton of options for investing as described in DC’s post 8 ways to start investing. An individual investment account isn’t a bad idea, especially if you have your eye on specific company stocks you want to purchase.
Just keep your money away from your mattress or dresser drawers!
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This is intended to be a basic primer for those getting started and wondering where they should save. I know a few people who don’t even have a checking account, so I hope this helps!
Of course, everyone’s circumstances are different. If you’ve found investing your emergency fund works better for you, or that you enjoy CDs, or that it’s more advantageous to invest everywhere but your 401(k), go for it!
Where do you keep your money? Do you have a savings and checking account? Do you have a retirement account? Know anyone that doesn’t have either?
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I sometimes feel I have my money spread over so many accounts. But I have a checking, money market (savings) account, HSA, 401k, IRA, brokerage accounts, and of course a big tub of change in my bedroom :) Each serves their own purpose though.
I think I need to move my savings into an online savings account that has a higher interest rate (a tip I learned from Ramit in “I Will Teach You to Be Rich” – I just haven’t done it because I like being able to transfer it in an instant. Gives me a sense of security, I guess.
We have money all over the place – business checking, regular checking and savings, and investments!
I probably need to consolidate some of my accounts. But I definitely have all the ones you mentioned. I’m a big proponent of putting more money into tax-free or tax-deferred accounts. I didn’t take advantage of them as much as I should and could have in the past. It really pains me when I hear someone not even contributing enough to get their company’s full match in the 401k. That’s free money!
I keep my money in a mix of accounts – checking, savings, a Roth IRA, a brokerage account and a company-sponsored retirement account. Unfortunately the checking and savings both earn really bad returns, so I’m looking into moving some of my savings into either an online savings account or a money market account to earn higher interest.
I keep my money in a number of the accounts you mentioned and track all accounts and balances in a net worth spreadsheet. One thing I haven’t invested in is a CD. I think once you reach the max for your 401(K) and IRA, a CD is a great low risk investment if you don’t need the money right away.
I would not keep money in rental properties until you have lots in another account somewhere else! I was also reading an article about being broke while having a large 401k account, so I guess the boring old savings account should come first, at least enough to cover a few months expenses, before the 401k. Then I agree with DC that the HSA is the best account to max out if you’re eligible.
I keep my money in a mix of the accounts you mention. I have thought about investing in real estate for rental income, but it’s difficult to find the right property where I live.
My philosophy with my emergency fund is that I want it accessible (it’s an emergency!) but no so accessible that it tempts me (i.e. a new outfit isn’t an emergency). We keep ours in a money market account for that reason. I can write a check, but I don’t carry the checkbooks with me.
ferventfinance That’s a good point – you don’t want to keep your money so spread out it’s overwhelming. I’m a big fan of simplifying your finances if it ever gets to that point. The less of a chore it is to manage your money, the better!
Financegirl I can definitely understand that. At first, I wasn’t too big on it, either, but after opening a business account with a different bank, and seeing how much interest that’s earning over my regular bank, I’m convinced it’s worth it!
holly3 It took me a while to throw a business account into the mix, but I’m glad I did. Makes things much easier on that front!
Andrew LivingRichCheaply I know! I also get jealous since I don’t have access to a 401(k) – people don’t realize how valuable it is to have such a program through their employer (most of the time).
Ali_AnythingYouWant That’s such a big problem these days. I hate hearing about how much interest my parents used to get – years ago – from keeping their money in the bank. But hey, a little is better than nothing!
Financial Tour Guide Nice, sounds like you’re pretty organized! If you’re maxing out your retirement accounts, alternative accounts like a CD could be a good idea, depending on where you are in your journey.
Eyesonthedollar I definitely agree with that – I would never feel safe having a rental property without a large emergency fund. You never know what can happen, and a rental home is a huge investment (and risky).
Interesting about being broke but having a large 401(k) balance. You certainly don’t want to leave yourself with nothing in the present! I’d hate to see someone forced into thinking they should borrow from their 401(k) in a situation like that.
SavvyWithSaving I can imagine! Finding the right rental property anywhere is something to take your time with.
indebtedmom I think that’s a great way of looking at it, and I think a lot of people take that position. It strikes a good balance!
Like others, we have money in a variety of different accounts – IRAs, online savings accounts, HSAs and traditional banking accounts and all with specific goals/needs. We keep very little in a traditional savings account. We keep around $1,000 in it just in the event we need cash right away but rarely touch it.
Be careful with “keeping your money” in illiquid assets like real estate. It’s pretty well locked into place. I like having multiple types of accounts/investments for my various goals. Real estate for cash flow, mutual funds/index funds for long term wealth (in 401K/roth/after tax), savings accounts for sinking funds, and a checking account for daily spending.
We have a checking account, retirement, and then a few savings accounts as well. I know so many people who don’t have any retirement accounts. I feel like now (in your 20s/early 30s) is the time to really set that money aside so that your money can really work for you instead of the other way around.
FrugalRules I wish I could feel “safe” doing that! I’m such a worrier and I like having a cushion I can get to right away, just in case, but I know it’s not earning much in a regular savings account.
Hannah UnplannedFinance I agree with that – I didn’t mean to sound so casual about keeping money in properties, as it’s extremely illiquid. I really like how you pair your goals with certain accounts!
Christina@EmbracingSimple Yes! I was talking with a friend the other day and he said he only had a checking account. Not even a savings account. I was blown away. If we can’t even get to that step, how are we supposed to save for retirement?
As of right now I’m going the safe route by having my money going to checking and saving accounts. Once my debt is paid off I will definitely put the majority of it elsewhere.
Jason @ The Butler Journal Sounds like a good plan!
I keep nearly all my money in specific stocks. It took some real effort for me to recently bulk up my emergency fund. Definitely not the conservative option, but I just love knowing my money always has the opportunity to be doing something in the stock market – although important to have at least a little cash on standby just in case!
I have a checking account a few online savings accounts and a Roth IRA. I’m not eligible for a HSA and don’t have a 401(k) with my employer. I would like to build my savings a bit before I invest in something like real estate or try different investing techniques.
Jason@Islands of Investing It can be hard to come to terms with the opportunity cost of having a larger emergency fund. It’s what helps me sleep at night, but I always think about what I could be earning in the market, or how I could pay off more debt. It’s a delicate balance!
Chonce Same here! I don’t have too many accounts right now, but when I pay off my student loans, I plan on investing more.
We need the liquidity right now thanks to random expenses popping up. Maybe when we have more money floating around we’ll be able to park it in multiple places.
I did look into CDs, but the rates are so low that it’s just not worth tying up the money there. Instead, I just have a Capital One 360 account that at least bears a little interest.
AbigailP I hear you on that! I agree on the CDs, and my 360 account has been great so far as well. It earns much more than the bank account I have with a local branch here.