Interest accruing savings account for reserve funds?

[Patrick Gault]

Currently, I'm depositing my reserve funds into a generic savings account.  But I'm wondering if there is a better low-risk option for that money, which is just sitting there for a rainy day, that would help it grow on its own over time and allow me to withdraw funds as needed.  

Thanks for any and all advice!

[Brian Schmelzlen]

Hi @Patrick Gault,

A lot of this depends on both on your time frame (for your first withdrawal) and how you define "low risk".

If you are looking at needing the money in less than a year, the only "low risk" option that I am aware of is keeping it in cash.  By that, I mean a savings account.  A number of the online banks are offering interest at around 1.65% to 1.7% which is pretty good, and federally insured.

If you are willing to hold onto something for a few years, I would consider Treasury bonds.  They will not make you a lot of money, but they are a very safe asset and currently pay a better interest rate.  I believe its currently around 3%; of course the tax benefits of this investment is nice as well.  However, most likely interest rates will be going up significantly, so if you sell the bond you may be forced to sell at a discount.

If you are willing to hold onto an investment for at least 5 years (longer is ideal) and are comfortable with volatility, index funds might be a good choice for you.  This is a riskier investment than the other two I mentioned, but with a fund that covers a broad swath of the market the risk is reduced through diversification.  There will be volatility, so if you are looking for only a short-term placed to park you money this is not a good choice for you.  If you are looking for a long-term option, it would probably do the best for you in terms of total returns.