Best Place for Cash?

Many people want to know the best place to keep their savings. The answer is that it probably doesn't matter!

Let me explain.

According to a CNBC survey, more than half of Americans keep their savings in a traditional bank savings account. The rest put their savings in a high-yield savings account (HYSA), brokerage account, CD, or some other type of account.

Today, most traditional banks are paying around 0.01% interest on their savings account. Both HYSAs and brokerages are yielding around 3.8 - 4.3%. That's a big difference. And, for that reason, it doesn't make sense to keep your savings in a traditional bank.

But should you put your money in a HYSA or a brokerage account or invest it in T-bills (currently yielding ~4.3%)? If a HYSA, which one has the best rate? How do I know which one will always have the best rate?

Here's why it probably doesn't matter where you put your savings so long as it's not in a traditional bank. Take a look at the table below. It shows the amount of interest you will earn per quarter for various balances at different interest rates.

If you have $10,000 worth of savings, you will earn $100 per quarter at a 4.0% interest rate. What about at a 5% interest rate? You will earn $125 per quarter. That's only a $25 difference!

If you have $20,000 worth of savings, you will earn $200 per quarter at a 4.0% interest rate. What about at a 5% interest rate? You will earn $250 per quarter -- a $50 difference.

You'll have to decide whether an extra $25 or $50 is significant to you, but here are some things to consider.

• These rates are constantly changing so it's unlikely that you'll ever be at the bank or brokerage paying the highest rate for long.

• Most HYSAs (and brokerages) compete with each other so their rates are always in the same ballpark.

• So long as you're getting a competitive rate, it doesn't really matter if it's the highest available. The difference is likely negligible.

• There's a convenience factor. Do you really want to keep moving your money around to always have the best rate?

If you have $50,000 or more in savings, it may be worth it to identify the best place to park that money. But it begs the question...why do you have that much money uninvested in the first place? One good reason would be an emergency fund. Apart from that and perhaps a few other special cases, you shouldn't have such large amounts of money sitting on the sidelines. Inflation will quickly erode the value of those dollars.

My advice? Just park your savings somewhere other than a traditional bank where you'll earn a competitive rate and don't worry about it beyond that.

Final thought: Harry Sit over at The Finance Buff site makes a great case for keeping your savings in money market funds or Treasuries.