return, you’ll have money in case you need it right away.”
The next tier should hold money you don’t need right away. “One strategy is to build a CD ladder,” says Jordan. “You might put 25% of your money for this tier into a one-year CD. Put another 25% into another one-year CD that matures three months later, and so on, until 100% of your money in this tier is invested in four staggered one-year CDs. You’ll have a CD maturing every three months, if you need the cash. If you don’t need the cash, you can roll it into another one-year CD.”
Of course, taking money from a certificate of deposit prematurely will incur a penalty. Typically, fines are equal to three months’ interest on short-term CDs and six months’ interest on CDs longer than 18 months. It pays to consider penalties as well as interest earnings before you purchase a CD, since penalty structures vary widely nationwide.
The third tier, says Jordan, might be for cash you don’t expect to need for a few years— you might be expecting to pay college bills, for example, or a down payment on a house.
Another way to get some return on your cash is to open an online savings account. “I’ve used Emigrant Bank’s DollarSavingsDirect for myself and for my clients,” says Susan Moore, a financial planner in Watertown, Massachusetts. The current yield is 1.5%; according to SavingsAccounts.com, other online savings accounts offer yields from 1.10% to 1.60%.
Typically, brick-and-mortar banks allow you to electronically link your personal checking account to the online savings account. If that’s the case, it’ll take just a few mouse clicks to transfer money from your checking account to the online savings account (to get the higher interest), or from the online savings account to your checking account (when you need the cash). These accounts should come with no fees or service charges.
As you might expect, online savings accounts are federally insured, up to $250,000 per account, per bank. Although you generally have access to your money when you need it, it may take a day or two to transfer funds into your checking account, so be sure to plan ahead.
Betting on bonds
If you can part with your cash for more than a year or two, you may get even higher yields with a short-term bond fund. These funds hold bonds that are maturing in a few years.
Moore’s suggestions include Vanguard Short-Term Treasury Fund (VFISX) and Fidelity Short-Term Bond Fund (FSHBX). As the name suggests, the former invests primarily in securities issued by the U.S. Treasury. So, shareholders don’t have to