How do I get the best savings account rate on $40,000 while keeping liquidity?

Q: How do I get the best interest rate on $40,000 while keeping liquidity?

A: You have a few options. The major themes in answering your question are determining how exactly you need to define liquidity, and how you shop for the best provider no matter what vehicle you choose.

3 savings account options and levels of liquidity

It is important to figure out precisely what you mean when you say you want to keep the money liquid. Is the liquidity need a short-term certainty, or just a possibility that could occur sometime in the next few years? Will your liquidity need apply to all $40,000, or just a portion of it?

Depending on your answers, here are some options:

1. Savings account or money market account

If you need full liquidity at any time, a savings account or money market account with FDIC insurance coverage is the most appropriate option. These allow immediate access without penalty, do not fluctuate in value, and offer the security of FDIC insurance limits up to $250,000 per deposit, per covered institution for deposits.

2. A CD with a moderate early withdrawal penalty

The trade-off with certificates of deposit is that they typically offer higher interest rates than savings or money market accounts, in exchange for locking your money up for a specified period of time. If your liquidity need is at least several months in the future, and/or is only a slight possibility rather than a high probability, the extra yield you can earn on a CD might be worth risking the early-withdrawal penalty, especially if you can find a CD offering a relatively mild penalty.

3. A CD ladder

If your need for liquidity applies to only a portion of your $40,000, you might consider investing just that portion in a savings or money market account, while putting the remainder in long term CDs. If you anticipate a series of liquidity needs in the months or years to come, a corresponding series of CD terms with a CD ladder might give you the best combination of yield and liquidity.

Shopping for the best savings account rates

Having figured out which type of vehicle best fits your liquidity needs, you can shop around for the best terms on that type of vehicle. Use online tools such as the MoneyRates.com savings account, money market account and CD rate pages to compare products.

Compare the best CD rates

As you do so, remember to compare like against like. For example, don't compare the yield on a 3-year CD at one bank with the yield on a 2-year CD at another bank - longer CDs will generally offer higher rates.

Also, whether you are depositing the full $40,000 in one vehicle or spreading it among multiple accounts, make sure you are comparing rates that apply to the size of your deposit.

Pay attention to early withdrawal penalties

Finally, if you are looking at CDs, remember that in addition to comparing rates you should also take into account the severity of their early withdrawal penalties.

Congratulations on looking to make the wisest move with your money. As low as interest rates may be these days, $40,000 is a significant enough sum of money that shopping for the best terms possible can make a meaningful difference in the amount of interest you earn.

Got a financial question about saving, investing, or banking? MoneyRates.com invites you to submit your questions to its "Ask the Expert" feature. Just go to the MoneyRates.com home page and look for the "Ask the Expert" box on the lower left.

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