The stock market’s volatility has many investors feeling uneasy. Some are increasing their savings to prepare for future expenses, but experts warn against keeping money in cash indefinitely. “Keeping money in cash forever isn’t a plan,” says Rebecca Palmer, a certified financial planner in Washington, D.C. “It’s actually postponing a plan.”
More than a third of consumers expect stock prices to decline over the next 12 months, down from April but still higher than in January.
“There’s definitely a feeling of fear in the markets right now,” Palmer notes. “A lot of people are feeling this, and it’s OK.” However, she emphasizes that fear is a starting point, not a strategy. Investors today face an overwhelming number of alarming headlines and social media doom, Palmer says.
“They just have a lot more overwhelm to deal with than prior generations did, even if it’s the same kind of market turbulence that happens.”
Palmer warns against keeping money in a checking account that earns no interest. “You’re losing money to inflation,” she says. So where can you park your cash if the stock market makes you uneasy?
Here are a few options to consider:
High-yield savings accounts offer higher interest than traditional bank savings accounts. Many are available through online banks, and if they’re FDIC-insured, they offer the same protections as brick-and-mortar banks. “If you can get 4% on your savings, or even 3.8%, versus the point-nothing that big banks offer, then take the better rate,” says Cindy Sforza, a CFP with Lucidity Wealth Advisors in Brea, California.
Bank certificates of deposit (CDs) are short-term savings accounts that allow you to lock in an interest rate for a set period.
Avoid cash hoarding risks
The trade-off is that your money is locked in; you’ll pay a penalty for early withdrawal.
“Frankly, CD rates today are pretty close to what you can get in a high-yield savings account,” Sforza says. Money market accounts are savings accounts that offer a higher interest rate along with limited check-writing and debit card access to your funds. These accounts may offer slightly lower rates than the best high-yield savings accounts, but they provide more accessibility.
Treasury bills, or T-bills, are government-backed investments with terms ranging from four weeks to one year. They are available for purchase through banks, brokerages, or directly from the Treasury website. T-bills offer the advantage of being state and locally tax-free.
“You’re getting a little bit more yield there too, especially if you’re in a high-tax state,” says John Bell, a CFP with Free State Financial Planning in Columbia, Maryland. Although these methods will earn interest, they’re not the best solution for long-term savings and investing, Sforza says. If it’s money you’re not going to touch for at least five years, investing might be a better option.
“Yes, the market goes up and down, but that’s your long-term money,” she says. “That’s not the money you’re relying on tomorrow to pay your bills.”
If the stock market stresses you out, consider letting your portfolio do the work for you. Index funds, index ETFs, and target-date retirement funds are easy ways to start investing, Sforza says.
