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If you’re working toward a savings goal, you have a lot of options for where you can put away your cash. Savings accounts, certificates of deposit, money market accounts, cash management accounts and investment accounts are all possibilities.
So which should you choose? That depends on how far away your goal is, how much you hope to earn on your cash and how often you want to access it. Here’s how to decide which savings or investment vehicle is best for you.
Factors to consider when stashing your savings
The features of different accounts can help you select the right savings vehicle. When deciding where to stash your savings, consider:
Access to withdrawals. Some accounts — such as CDs and retirement accounts — charge a penalty fee if the account owner withdraws money before a certain time. If you think you’re going to need your liquid cash in the near future, that will affect your choice of account.
Interest rate. Some types of accounts offer higher interest rates or potential investment income than others. Both factors can also vary depending on the bank or brokerage.
How far away your goal is. Think about how much you’ll need to save to achieve your financial goal and how long it will take you to get there. If it’s longer than several years, shift your mindset from saving to investing.
“Anything past four or five years is no longer savings,” said Todd Christensen, education manager for the nonprofit debt relief service MoneyFit, in an email. “You should see anything longer than four or five years instead as an opportunity to invest and build your net worth.”
With these points in mind, check out these savings options.
Where to put short-term savings
Short-term saving goals are those that will likely take less than a year to save for, like for a vacation, small emergency fund or a home improvement project. Good homes for that money include:
High-yield savings account. These accounts, typically offered by online banks, tend to offer much higher interest rates than savings accounts at traditional brick-and-mortar banks. Though the return is lower than with savings vehicles such as CDs or investment accounts, you’re able to quickly access your cash as needed.
Money market account. An MMA is a savings account that has some checking features, such as offering paper checks or a debit card. Interest rates for competitive MMAs tend to be similar to those of high-yield savings accounts. (Read more about how MMAs compare to savings accounts.)
Cash management account. CMAs — offered by brokerages rather than banks — typically have decent interest rates and some checking features, such as a debit card and ATM access.
Where to store medium-term savings
Say you want to save for something that may take a year or more, like an emergency fund with three to six months of expenses, a large wedding or a down payment on a house. An account that keeps your money safe and separate and earns a little interest is the way to go. The interest rates on these products usually don’t surpass inflation, so they won’t be optimal for building wealth.
“Instead, use these savings vehicles to keep your money safe from your impulses,” said Christensen.
High-yield savings account. Like short-term savings goals, medium-term goals are also a good match for a high-yield savings account, since they are liquid.
CDs. If you know exactly when you’ll want to use your savings — say, to purchase a house two years from now — consider putting the funds into a CD that matures just ahead of that date, allowing you to earn a set amount of interest toward your financial goal. Keep in mind that most CDs charge a penalty if you withdraw your cash before the end of the CD’s term. If that’s a concern, you can also consider a no-penalty CD, offered at some banks.
MMAs and CMAs. Money market accounts and cash management accounts can be solid options here too, due to their easy access, decent interest rates and useful checking features.
Where to keep cash for long-term financial goals
Maybe your goal is to save for or invest in something that will take a decade (or several), like retirement or your child’s college fund; here are good options.
Investment account. Over a long enough period of time, invested cash tends to earn the highest rate of return compared to other savings vehicles. If you’re saving for retirement, an account like a 401(k) or an individual retirement account (IRA) will be the best option for your savings. However, retirement accounts carry early withdrawal penalties until investors are at least 59½ years old. Another alternative: You can invest in a taxable investment account, which doesn’t have penalties for early withdrawal, but you may owe capital gains taxes if you sell investments.
A good guideline is to keep cash invested for at least five years, to weather potential stock market volatility; being able to invest for the long term can help offset such fluctuations.
529 plan. 529 savings plans are tax-advantaged investment accounts that allow parents to set aside money for kids’ college tuition and earn compounding returns. If you want to save specifically for the costs of education, 529s are worth considering.
Whatever your financial goals, you have solid options for where to stash your money and, ideally, see it grow.