People investing for retirement generally rely on stocks and bonds, keeping loose cash in a money market fund with a brokerage or fund company. Ordinary expenses are typically paid through bank checking.
So is there a role for the old-fashioned savings account or certificate of deposit? Or are they just leftovers?
Actually, with stocks at the top of a long, long bull run, and bond values threatened by rising interest rates, some experts say this isn't a bad time to look again at traditional bank savings for emergency funds or money destined for some type of investment later.
Joseph Tatusko, founder of Mill Hill Advisors in Wilton, Connecticut, recommends bank savings for emergency funds kept separate from funds for ordinary expenses.
"Nearly everyone should consider having a stable value rainy day fund not subject to market variations" like those of stocks, he says. Most experts say an emergency fund should be large enough to cover six months of expenses.
With the average savings account paying about 0.6 percent, you won't get rich. But because the federal government insures bank savings there's virtually no chance of losing money. Holding steady could look pretty good if your stocks and bonds tumble.
Sure, there are other safe places to stash cash. Money market funds at your broker or fund company are not federally insured, but money markets have an awfully good track record for safety.
But they, too, pay almost nothing, so why not opt for the near-absolute safety of bank savings? There are two top choices: a traditional savings account, or certificates of deposit.
A savings account, unlike a CD, can be used as an efficient backup to avoid overdrawing a checking account. With a computer or smartphone, you can shift money in and out via links to your checking account and outside accounts with brokers and fund companies.
CDs, on the other hand, aren't as liquid as ordinary savings accounts, since you must tie your money up for a set period to earn more than you can get in savings. Average yields range from 0.71 percent for a six-month CD to 1.83 percent for a 60-month deal, according to Bankrate.
"There aren't many reasons to keep 'significant' amounts of cash in a bank, beyond things like having a checking account or access to an ATM," says David Bakke, a writer for Money Crashers, a financial-education website. "The interest rates on savings accounts are minimal to none, so there's not much benefit. You may want to keep money in a CD, however, despite the fact that it won't gain you a ton of interest, to prevent you from accessing it easily to buy things you might not need.
"Bank savings can also be used for your emergency fund, as long as you trust yourself to use it for emergencies only. And it can also be used as a back up to your checking account, in case you need to quickly and seamlessly transfer funds to it in order to pay a monthly bill."
Typically, the saver loses the most recent three months interest earnings for withdrawing cash early from a CD. That's not such a terrible penalty given that the main benefit is safety rather than earnings.
On the other hand, the premium earned by tying money up for five years may be too small to bother with, especially as CDs may become more generous in coming months and years. If you can find a two-year CD paying upwards of 1.4 percent, why tie money up for five years just to get 1.8 percent?
"Given the current interest rate environment, I don't see any value in five-year CDs," says Karthigan Michael Srinivasan, owner of personal finance blog, Stretch A Dime.
To squeeze the most out of your CDs, you can ladder, or own some short-term CDs for easy access to cash and some with longer terms that will pay more. But Ross Atefi, an advisor with Lincoln Financial Advisors in Irvine, California, recommends emphasizing terms of one to three years since longer terms offer such a small premium these days.
"Going out to a five-plus year CD in today's environment does not provide a significantly higher interest rate, and requires you to lock-up the money for five-plus years," he says.
Another issue with CDs: where to buy them? Srinivasan and many other experts recommend shopping among online-only banks, which often pay more because they are not supporting brick-and-mortar branches.
Since CD holdings will be tied up, you don't need services offered by physical branches, such as counter services.
"Accounts through physical branches typically pay such low interest rates that it is hardly worth having one separate from your checking account," Atevi says.
What else to look for?
"When choosing a bank, look for the fee schedule. It should be minimal, or at the very least offer workarounds to avoid monthly fees," Bakke says.
"You should also check online for reviews regarding customer service, as that varies widely and is obviously important" he adds. "The number of local branches and ATMs should also be investigated if that is important to you. If you need access to mobile banking, be sure to check that out as well. You should also absolutely make sure that the bank has insurance through the FDIC, so you know that your funds are protected."
Tatusko recommends looking first at any credit union you are eligible to join, usually through work or a professional group. Credit unions can offer better deals because they are nonprofits.
"Many credit unions pay interest on checking account balances, sometimes quite competitive with CDs and without early withdrawal penalties," he says. "To qualify one may have to maintain a certain balance or perform a minimum number of credit transactions per month. And you get similar protection to what the FDIC provides on bank accounts."
