Investing a portion of that cash and earning a return on the investment is a way to help guard against inflation. If inflation averages about 2% per year, and you can earn at least 2% on your cash, you maintain the same amount of purchasing power. If you can earn more than 2%, you’ll beat inflation and put yourself in an even better position to enjoy your retirement. The key is to stash your money somewhere it has the potential to grow and continue working for you, even though the risk is always there that you could lose money as well.
Here are three ways to dig the cash out from under your mattress.
Although savings accounts aren’t earning much interest lately—a national average of 0.09%, according to Bankrate.com (as of November 2017)—you might be able to do better than that with some research. Some high-yield savings accounts may pay as much as 1.4% on your cash. While you can get beyond the national average, you’re likely still not going to beat inflation with this approach, so it’s not the place to park all your savings. It’s usually the best as an option for your emergency fund, or for any purchases you’re planning to make in the next year or so. And because the money isn’t invested, you cannot lose it in a market downturn. Also, if the savings account is opened in an FDIC-insured bank the deposit can be insured for up to $250,000 by the FDIC.
Exchange- traded funds (ETFs)
Like a mutual fund, an ETF is a collection of investments bought and sold through a brokerage firm. An ETF might track an index, non-U.S. markets or a commodity, or provide exposure to bonds or a particular industry, such as pharmaceuticals. Unlike a mutual fund, an ETF trades like a common stock, allowing investors to buy and sell throughout the day. (Mutual fund prices are set after the market closes each day.) ETFs tend to have lower fees than mutual funds, and they’re more tax-efficient, because the buying and selling of ETFs produces fewer capital gains. If you have some idea of how you’d like to invest your assets and you wish to minimize fees, ETFs can be a good choice for longer-term savings.
In a managed account, your investments are supervised by a professional, and personalized to meet your specific needs. Your money manager can create a mix of investments that matches your short- and long-term goals, investing style and risk tolerance, with the aim of providing you with the best returns. A manager can also strategize to reduce taxes as much as possible, buying and selling to offset gains as needed. If you’d like guidance on what to do with your money, or you’re tempted to pull your money out of investments every time the market wobbles, a managed account might be a good approach for you.
Whether you select ETFs or managed accounts consider things like fees, your investment objectives and risk tolerance. Remember that investing involves risk and it is possible to lose money when investing.
What you can do next
You can check a comparison site like Bankrate.com for the highest-yielding savings accounts available. A financial professional can help you determine which investing strategy is right for you.