Do you have a large but short-term savings goal? Perhaps, like me, you want to save at least 20% of a future home as a down payment. Maybe you want to purchase another vehicle or recreational toy in cash versus going into debt, or you just want to finally finish a much-needed home improvement project. No matter the reason, one thing these diverse savings goals have in common is that they’re short-term – you’ll want to be able to use the money in say, one to four years.
If you don’t know how much you’ll need to set aside every month to reach your goal or what interest rate you might need to reach it in a certain time frame, use an online amortization table to help you calculate that number. Knowing what you need before looking at your options will allow you to quickly locate the one that best meets your needs.
So what are your options? You could just deposit cash into a savings account at your bank, but brick-and-mortar accounts aren’t going to yield much more than you put into them even though interest rates have shot up rapidly in the past few months. On the other end of the spectrum, you don’t necessarily want to invest any funds earmarked for the short term in risky stocks or long-term bonds either.
For short-term savings goals, there are three main features you’ll want to keep in mind:
- Security (possibly FDIC-insured)
- Minimal risk (not subject to market volatility)
- Liquidity (easy, fast withdrawal without penalties)
For short-term savings, it’s more about the return of the money versus return on the money. But while you’re at it, there are several options that can accomplish both with minimal risk:
- High-yield Savings Accounts
- CDs
- Money Market Accounts
- Investment Accounts
High-Yield Savings Accounts
Interchangeably called online savings accounts since that’s their mode of operation, high-yield savings accounts are becoming one of the most popular short-term, risk-free, highly-liquid options. With lower overhead, online banks can offer higher interest rates – anywhere from 10 to 20 times that of regular savings accounts. Like normal bank accounts, they’re still insured by the FDIC. A few of the downsides to these accounts are withdrawal restrictions (6 or less a month) and not being able to just hop over to a branch and take money out. Plus, even though they offer higher interest than regular savings accounts and the interest rates offered have been inching upwards, their rates are still lower than some other options.
Money Market Accounts
Money market accounts, another type of insured account offered by banks, blend features from checking, savings, and low-risk investment accounts. Like checking accounts, they often include debit cards, allow you to write a certain number of checks a month, and have fewer withdrawal restrictions than online savings accounts. At the same time, they can offer better interests because they trade in short-term, low-risk investments like U.S. bonds and CDs. Their focus is on getting the best market return for your money in the shortest amount of time. The downside is that some banks often require a minimum initial deposit of anywhere from $5000 to $25,000 but that’s changing too. CIT, for instance, just wants customers to have at least $100 in the account.
CDs (Certificate of Deposits)
If you can let your money sit for a while (from 3 months to a few years), CDs can offer higher interest than brick-and-mortar savings and sometimes even online savings accounts. Like other types of bank accounts, they’re also insured. To maximize your earnings without suffering early withdrawal penalties, some recommend splitting up your deposits into 3 or more ‘ladders’ of 3-month increments. That way, if interest rates rise, you can re-invest an expiring CD into a new one with a better rate.
I-Bonds
It’s all the rage lately because inflation is such a hot topic these days, but I-bonds isn’t new. I know someone who’s had the government-issued inflation index bonds for the past 20 years, so it’s been around and it’s a time-tested investment vehicle. What these bonds give you is principal protection with a known fixed interest rate when you buy it plus a variable interest rate tied to inflation. There are yearly limits so you can’t just put everything you have into these bonds but for short-term savings, this is a great option as long as you don’t mind working with the ancient web platform that the Treasury Department is yet to bring to modern standards.
Brokerage Accounts
Finally, there are brokerage accounts that let you invest in securities such as stocks, bonds, and mutual funds. These are not FDIC-insured, will require brokerage fees, and your investment is subject to market fluctuation. And as you can see this year, your investment can lose money even though long term returns have been good. Also, don’t confuse the money market funds you can invest in via the brokerage firms with the money market accounts we mentioned earlier. Money market funds are mutual funds with low risk offering a minuscule yield nowadays, as opposed to an account type.
As you consider how to save for a short-term goal, consider which of these secure, low-risk, highly liquid, but still interest-bearing options might provide the best return on your money. Who knows – maybe you’ll save and earn enough to exceed your initial savings goal and start working on the next.
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My husband and I are trying to save for our home down payment, and have been trying to decide the best options to grow our savings as we work for it. Great tips, thanks for sharing!
Hey Jessica, great advice!
I would note that opening and personally managing a brokerage account can often prove to be very risky for someone with less experience. Of course you clearly note this, but it always concerns me to hear someone say they are looking for quick returns in the markets – your portfolio is much better built for the long haul!
I also agree with the editor post of Personal Capital, it’s a great tool and worth checking out. If you get a minute, give EarnSmart a look as well – we can’t pay interest, but we do give you cashback for inviting friends and family which, the way it’s structured, feels pretty close (and exceeds 1% pretty quickly). We also connect our users with great deals if you’d prefer to save up to make a guilty pleasure purchase responsibly!
Investing more risky assets do require a certain level of competency, but start small and you can gain experience without hurting yourself too much.
Thanks for the alert on EarnSmart. I’ll check it out.
If you don’t expect to need the savings for a while, such as an emergency fund, go ahead and put some in a standard savings account, like Ally (I have an acct there and really like it), but put most in liquid assets that usually earn a bit more. Betterment, for example, has this option for accounts there, and if it’s just to have it put aside and without planning to use it but needing it to be fairly accessible, this is a good option and should earn more than the 1% at Ally or other banks.
Great Post!
Savings accounts are key tools for investments. I used to keep my savings in cold hard cash in an envelope in my closet. I would add $10-20 a week to it and it was a place I could forget about the money I had. If I was ever so lucky to find a nice $20 spot in a pants pocket, in the envelope it would go. This method helped a lot, but came with caution as I was often tempted to tap into it.
One piece of advice I would add (even applicable to short-term savers), would be to open an online savings account. Ally Bank currently offers 1.00% interest and has only increased since I opened my account three years ago. Keeping my savings at a different account (such as online) makes it seem much further away and allows for that “can’t touch it” feeling we should have for our savings accounts.
The “further away so you can’t touch it” feature sounds like a small benefit but the fact that you don’t see that money often can be a real money saver. I second the suggestion to open an online savings account, because the 1% interest, though small, is the best deal for short term savings when comparable investments like the treasury is yielding much less.