It can be smart to take on risk when you’re saving for a goal that’s 30 years away, like retirement. But you probably don’t want to risk losing your savings if you plan on buying a car, putting a down payment on a home or sending your kid to college sometime in the next five years.
Keeping your savings safe should be priority No. 1., so you’re not going to want to invest this money in the market, said Roger Ma, financial planner at lifelaidout and author of "Work Your Money, Not Your Life." The average long-term rate of return in the stock market is anywhere from 7% to 8%, but you won’t see those types of returns for short-term investments.
You’re also going to want penalty-free access to your money in case you need the money earlier than expected. For example, if you’re gearing up to buy a home in a year but find your dream home six months early — are you going to wait? No. You’re going to want your money now.
The good news is you have options besides a typical savings account earning next to nothing in interest. Here’s how to plan for a goal that’s a few months or years away.
Making money should not be the goal of a short-term savings plan, said Ma. It’s about safely maintaining and building the funds you need to achieve your goal. You’ll also need realistic growth expectations for your savings because interest rates aren’t great.
"It’s important to know the purpose of short-term goals," said Ma. If your ability to buy a car in six months depends on the interest you’ll earn on the account, then you probably need to readjust your goal and timeline, said Ma.
That doesn’t mean you won’t earn anything on a short-term savings or investment plan, it just means you’re not going to see big gains overnight.
There are a handful of short-term savings and investing options ranging from a few months to a few years, but it’s up to you to decide how much risk you’re willing to take.
High-yield savings accounts: If you’re looking for a risk-free route, a high-yield savings account is your best bet, though interest rates are low right now. You can regularly contribute to it and you won’t be penalized if you withdraw funds. Be prepared for the rate to fluctuate — the interest rate you’re initially offered likely won’t last, said Ma.
If you’re looking for the best yield you’ll want to look at online banks instead of brick and mortar, said Tim Ranzetta, co-founder of Next Gen Personal Finance. "Online banks have lower overhead and that affords them the ability to offer better rates."
Short-term bonds: A bond is a loan to a corporation or the government with an understanding you will be paid back with interest after a certain amount of time. These are lower-risk investments but you can still lose money, said Ma.
Certificates of deposit: Similar to bonds, CDs are one-time investments that mature over a period of time. You’ll see rates between 1% and 1.35% for CDs stretching from a few months to a few years. The longer the duration the higher the yield. Unlike bonds, you’re not at risk of losing the money you put in. You can withdraw funds from a CD but you’ll face heavy penalty fees.
Money market account: This type of savings account offers high returns in exchange for a large initial deposit, which will then determine your interest rate. You’ll also need to maintain a high balance or risk a minimum balance fee. Similar to other savings accounts, you can make up to six transactions per month, not including ATM withdrawals. You can also write a check against the balance.
Money market fund: Also known as a money market mutual fund, it’s made up of several individual investments that are low risk and pay out regularly. The most common investments are Treasury bonds, cash and commercial paper (a debt issued by a corporation). In general, you can get a rate of return that’s 1% or more, but it’s important to remember that every mutual fund has a set management fee.
Try to keep your search for short-term savings and investing options short, said Ranzetta. Otherwise you’ll spend more time searching for an account than you’ll ultimately earn from it.
You’ll also want to make sure you can access the money in case of an emergency. If your money is tied away in a CD and something happens, just remember you’ll face hefty penalty fees getting that money back.
Chasing the highest interest rate won’t make a huge difference. Instead, focus on keeping your money secure if you know you’ll need it within a certain time frame, said Ranzetta. Look out for any account promising high returns because it’s probably too good to be true in today’s climate.
"If someone's promising 5% or more, there’s a lot more risk embedded in that than you know," he said. "You have to be cautious, especially if it's money you want in the short-term. Sometimes the simplest strategy is best."
Image: Getty Images / Guido Mieth
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