How to Invest Your Savings for Short-Term or Long-Term Goals

When it comes to saving and investing, time matters.

Money you need soon generally shouldn’t be in the stock market. The money you’re investing long-term — such as for retirement — probably shouldn’t be in a plain old savings account. Why? Despite a string of rate hikes from the Federal Reserve in 2022 and 2023, the average rate of return for savings accounts is still relatively low compared to that of the stock market.

So before you decide on a short- or long-term investment, think about what you’re investing for and how liquid — or accessible — you need your cash to be. A timeline can help. Are you looking for a safe way to invest your money for one year or less? You should likely stick to high-yield bank offerings, such as savings accounts or certificates of deposit. Are you banking money for a dream trip to Tahiti for your 10th wedding anniversary? You probably have enough time to take more risk by investing at least a portion of that savings in the stock market.

Here's how to invest money for short-, mid- and long-term financial goals, followed by an explanation of each strategy.

Online savings or money market account

• Current potential annual return: 5% or more on the high end.

• Pros: Liquidity, FDIC insurance.

• Cons: Relatively low interest rate compared to riskier investments.

If you’re willing to stash your money in an online savings account, you can earn upwards of 5% right now. To be clear, this is more saving than it is investing. But you shouldn’t be after a big return. Liquidity is the name of the game here, and your money will be accessible and FDIC-insured against loss.

Banking online doesn't mean you have to give up the conveniences of your neighborhood bank, though you can’t walk in the door to a line of tellers who know your name. But you can still do most, if not all, of the essential banking duties: Deposit checks by scanning them with your phone, move money back and forth between accounts, and speak with a customer service rep by phone or live chat.

A money market account functions like a savings account but generally has higher interest rates, higher deposit requirements, and comes with checks and a debit card.

Federal regulations restrict the number of monthly transfers or withdrawals you can make in both accounts.

A bank CD

• Current potential annual return: Around 5% or more.

• Pros: Higher interest rate than a savings account, FDIC insurance.

• Cons: Not liquid, may have minimum deposit requirement.

If you know you won’t need money for a set period and don’t want to take any risk, a CD might be a good choice. You can find CDs with terms ranging from three months to six years. In general, the longer the term, the higher the interest rate. (You expect more return in exchange for your money being less accessible.)

» Take a spin around: View the best CD rates

CDs aren't ideal during a rising interest rate environment because they lock your money away at a fixed rate, with a penalty of three to six months’ interest if you withdraw early. Being stuck in a low-rate vehicle while interest rates are climbing is like eating a salad during a pizza party: sad.

If you go this route and you’re concerned that interest rates will go up, you can consider a few other options:

• A laddered CD strategy combines several CDs with varied terms. If you have $10,000 to deposit, you might put one-third in a one-year CD, one-third in a two-year CD and one-third in a three-year CD. That way, if interest rates are higher after a year, you can pull funds out of that one-year CD and move it to something with a better rate, capturing a higher return for at least a portion of your savings.

• A bump-up CD allows you to request an interest rate increase if rates increase during the CD term. You can generally request this increase only once, but there may be downsides. For example, these CDs may have a lower-than-average initial interest rate and higher minimum deposit requirements.

• A step-up CD is like an automated bump-up CD. The rate automatically increases at set intervals during the CD term; you don’t have to do anything. However, the initial interest rate is likely to be low.

Short-term bond funds

• Current potential annual return: 4% or more for U.S. government bonds, more for those who take on more risk.

• Pros: Liquid.

• Cons: Some risk of principal loss; funds charge expense ratios.

Bonds are loans you make to a company or government. The return is the interest you collect on that loan. As with any loan, they’re not risk-free. For one thing, the borrower could default, although that’s less likely with an investment-grade corporate or municipal bond and downright unlikely with a U.S. government bond. (Investment-grade is a quality rating for municipal and corporate bonds that indicates a low risk of default. U.S. government bonds aren’t rated in the same way, though they’re considered very safe.

» Read more: How to buy bonds

The bigger risk is that bond values typically go down when interest rates rise because the bond’s rate may be below the new market rate, and investors can get a better return elsewhere. That’s why short-term bonds are listed here: Short-term bonds take less of a hit when interest rates increase. You can sell a bond fund at any time, but if you are selling to get out as interest rates are rising, you could face a higher loss with long-term bonds than short-term.

Through an online brokerage account, you can buy a low-cost index fund or exchange-traded fund that holds corporate bonds, municipal bonds, U.S. government bonds or a mix of all of the above. This will diversify your investment, as the fund holds many, if not thousands of bonds. These funds can have minimums of $1,000 or more.

Most stock brokers offer a fund screener that allows you to sort funds by performance, expense ratio and more. Because you’re not investing in a retirement account, you might consider a municipal bond fund; municipal bonds are federally tax-exempt, making them a good choice in a taxable account.

» Get a closer look: Bonds vs. CDs

Many long-term goals are retirement-related, which means you should be investing in a tax-advantaged account. That’s a 401(k), if your employer offers one with matching dollars, or an IRA or Roth IRA if your employer doesn’t. Here’s how to decide whether you should contribute to a 401(k) or IRA, and then how to decide between a Roth and traditional IRA.

» Read more: What is a long-term investment?

If your long-term goal isn’t retirement, or you’ve maxed out the contribution limits of these accounts, you can open a taxable brokerage account (consult our picks for the best brokers). Aside from the tax treatment, one major difference is that you can put as much in a brokerage account as you want and pull money out at any time. IRAs and 401(k)s are designed for retirement and often impose penalties and taxes on distributions before age 59½.

Equity index funds

• Potential annual return: 7% to 10% for a long-term historical average.

• Pros: Long-term growth, diversification.

• Cons: Higher risk, minimum investment requirements, fund fees.

Generally, you only want to play the stock market when investing for a long-term goal. And even if your deadline for using the money is flexible, you need to accept that you're taking on more risk and might lose money.

For long-range goals, putting at least a portion of your savings toward equities (stocks) makes sense because you have the time horizon to weather market ups and downs. You can always dial back the level of risk you’re taking, for instance, by moving more toward bond funds as your goal date approaches.

» Read our guide: How to invest in stocks

One of the best ways to build a diversified portfolio is to purchase low-cost equity index funds. These funds track an index — say, the S&P 500 — and by track, we mean they aim to keep pace with it; nothing more, nothing less. This is a departure from an actively managed mutual fund, which employs a professional who tries to beat the market (and, in reality, rarely does). As you can imagine, the latter has higher fees to account for that professional’s salary and often doesn’t make up the difference in performance. That’s why index funds tend to rule the roost.

» Read more: Understanding investment fees

Look for a no-transaction-fee fund with a low expense ratio that invests in a broad market index — again, the S&P 500 is a good example. Another good example is a total stock market index fund, which gives good exposure to a broad range of U.S. stocks. As you add more money to your portfolio, you can diversify further by buying index funds covering international and emerging markets equities. You may also want to temper some of that risk with a bond fund (more about this down the page).

You can purchase index funds through a brokerage account or retirement account. Though there are exceptions, they tend to have minimums of $1,000 or more.

Equity exchange-traded funds

• Potential annual return: 7% to 10% for a long-term historical average.

• Pros: Long-term growth, diversification, low minimums, tax efficiency.

• Cons: Higher risk, fund fees.

ETFs are a form of index fund that trades like a stock. You buy in for a share price rather than a fund minimum, which makes these funds easier to get into if you’re starting with a small investment and easier to diversify because you may be able to buy several funds with a relatively small amount of money.

ETFs also offer all the perks index funds do: Passive management that tracks an index, low expense ratios (in many cases — never assume a fund is inexpensive just because it’s an index fund or ETF), and the ability to buy a basket of investments in a single fund.

Robo-advisors

• Current potential return: Varies based on investment mix.

• Pros: Hands-off diversification and rebalancing, portfolio management, tax efficiency.

• Cons: Management fees, possible account minimum.

Robo-advisors aren’t an investment themselves but a way for you to invest. These services manage your portfolio: You provide details about your time horizon, goals and risk tolerance, and you get a portfolio to match, often built with ETFs, in either an IRA or taxable brokerage account.

The portfolio will be rebalanced as needed, and — if your money is in a taxable account — robo-advisors perform tax-loss harvesting to lower your tax bill. You’ll pay for the trouble, but the fees are reasonable compared to a human advisor: generally 0.25% to 0.50% of assets under management, plus the expense ratios of the funds used. You could pay under 0.50% for a managed, relatively hands-off portfolio tied to your time horizon and risk tolerance.

That means this could be a suitable choice for intermediate-term investments, as well — though most robo-advisor portfolios have some level of stock allocation, so you’d have to be comfortable with a bit of risk.

You’ll find a range of account minimums from robo-advisors. Don’t forget to consider account minimums when choosing the best advisor for you.