We often receive some version of this question:

What is your recommendation for a good high yield savings account or CD?

Our recommendation is to keep money that may be needed within the next six months invested in a money market fund, such as Schwab Value Advantage (SWVXX), which can be purchased in a taxable brokerage account. Money market funds are not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other government agency. However, they are a fairly safe vehicle for holding cash for the reasons discussed in our article, “How Safe is Your Money Market?“.

We don’t have specific recommendations for certificates of deposit (CDs) because their interest rates are always changing. You can find the current CD rates available through Charles Schwab here: Certificate of Deposit.

CDs are federally insured by the FDIC, but their valuation fluctuates depending on current interest rates. Another item of note is that they are not available for redemption until they mature. CDs are helpful when interest rates are high and the date when you need the funds is fixed and known.

However, if you are looking for an investment where the date you need the funds is unknown, then there may be better options.

For short-term investments, a money market fund is usually better. The valuation of a money market fund stays constant ($1 for $1) but the interest rate changes. In this way, a money market fund functions like a bond with zero duration.

For money that may be needed within the next 5-7 years, we recommend investing it in a short-term bond fund like Vanguard Short-Term Inflation-Protected ETF (VTIP) to give it a better chance of keeping up with inflation.

For money that may be needed in 8 years or more, we recommend investing it in 100% stocks to give it a greater chance of appreciation in order to support long-term goals. Our Gone-Fishing Portfolio calculators can be used to find some low-cost stock funds. If you are looking for one fund to invest in, you may benefit from reading our article, “Q&A: What One-Fund Could a Twenty-Something Invest In?”

It should be noted that the principle of a bond or stock fund is subject to variations due to market movements. As a result, you may end up with a negative return and less money than you started out with. The size, certainty, and future date of your withdrawal needs can dictate how you should plan around this concern.

If you are just getting started with investing, you may benefit from reading our articles, “Where Should an Individual Investor Open Accounts?” and “How to Implement a New Investment Plan.”

Photo by micheile henderson on Unsplash. Image has been cropped.