Personal Finance Insider writes about products, strategies, and tips to help you make smart decisions with your money. We may receive a small commission from our partners, but our reporting and recommendations are always independent and objective.
- As a financial planner, I help my clients prepare for retirement. But I also help them save for — and reach — their short-term goals, such as starting a business or buying a house.
- Money you’ll need in the next five years, such as your emergency fund or your down payment cash, should be kept somewhere you can reach it when you need it, like a high-yield savings account.
- You also want to keep it somewhere low-risk — i.e. not in the market — so it doesn’t lose value in volatile times.
- See Business Insider’s picks for the best high-yield savings accounts »
As a financial planner, I don’t just help people invest for the long term. My clients are in their 30s and 40s, and they want to enjoy their lives now, not just hope that they can do what’s most important to them once they retire.
Because of that, we need to understand not just what they need to save for retirement, but also what they need to do with the money they need much, much sooner — as in, the next few years.
Options trading Where to keep money you plan to use in 5 years or less
Cash you may need in five years or less usually includes money in your emergency fund. That can range between three to six months’ worth of expenses, and acts as a reserve you can tap into to cover an unexpected expense (like a medical bill or home repair) or an unforeseen circumstance (like losing your job).
Money you need in five years or less also includes what you need to fund short-term goals, plans, or projects. That could range from the money you want to save up to launch a new business this year, a down payment on a house, or a big, round-the-world trip you want to take before you buy that house.
Whatever your reason for needing cash in the near future, it should be kept in a safe place that you can easily access when you need it. Here are a few savings vehicle options to consider.
Options trading High-yield savings accounts
High-yield savings accounts are great options for larger sums of money that you need to keep safe — but that you may also need to access at any time. That makes these accounts good homes for emergency funds.
You can get to your money any time you need it, a critical feature of any account where you put cash designed to protect you from the unexpected. These accounts also provide a higher return than a regular savings account, and online banks often offer the best rates.
Options trading Certificates of deposit (or CDs)
This is another type of savings account that typically offers a higher interest rate than your standard savings option at a traditional bank. But unlike high-yield savings accounts, certificates of deposits (CDs) don’t allow you to access your money any time you want.
When you use a CD, you agree to leave your money in the account for a predetermined period of time. This is the term length, and it can range from a few months to a few years.
The longer the term length you commit to, the higher the interest rate you may receive. That’s the upside. But the trade-off is a loss of liquidity and flexibility. Should you suddenly need the funds sooner than you thought, you will pay a penalty for withdrawing the money early.
I really value freedom and control over my finances, which is why I usually don’t like CDs. Life can change quickly, so I personally use high-yield savings accounts or things like money market funds for my short-term cash needs.
Options trading Money market funds
Unlike CDs and savings accounts, money market funds are a type of investment — albeit one with very, very little risk and high liquidity.
These types of vehicles can offer an option for a higher yield than you might receive with a bank savings account and don’t limit access to your funds in the same way a CD does.
Money market funds can lose value in very volatile markets that see significant interest rate drops, so if you want to avoid any investment risk with your cash, you may be better off with a savings account instead.
Real Life. Real News. Real Voices
Help us tell more of the stories that matterBecome a founding member
Options trading Where NOT to put the money you need in 5 years or less
If you know you’ll need to access your money in the near future, you want to put your cash in a relatively safe and stable vehicle — i.e. not invested in the stock market. While you may get little to no return on those funds, you also take on very little risk.
If you risk losing your principal, then you also risk not being able to fund the needs or goals you identified as important in the next five years.
While you can earn a bigger return in the market than if you let your cash sit in a bank account, that opportunity should be reserved for funds you can commit to leaving invested for the long term (which means at least 10 years, but preferably 15 to 20 or more).
For short-term needs, stick to vehicles that offer you little to no risk so you can rely on those funds being available when you’re ready to use them.
Eric Roberge, CFP, is the founder of Beyond Your Hammock. He helps professionals in their 30s do more with their money and has shared his money tips with the Wall Street Journal, USA Today, CNBC, Forbes and MONEY Magazine. Get the BYH Newsletter today to learn how to make smart money decisions.
- More savings and retirement coverage
- How to retire early
- The best high-yield savings accounts right now
- The banks with the best CD rates
- When to save money in high-yield savings
Subscribe to the newsletter news
We hate SPAM and promise to keep your email address safe