Congratulations! You’ve decided saving for your future is important enough to actually do it. Sadly, that puts you ahead of most Americans who, on average, live paycheck to paycheck. But where do you put all this money you’ve committed to save? You have some options, so let’s go over some of the big (and more common) ones and see where I’d tell you to put what:
We currently have three savings accounts: general savings (for saving for our irregular bills such as property taxes), pre-retirement (for being able to pay our Roth IRA as early in the year as possible) and car repair/replacement. The money in these accounts is earning almost no interest, but it is safe. It is at our local, hometown bank in three separate FDIC-insured accounts. Boring…but safe.
No savings in here…only money that we plan to use for transactions throughout the month plus a cushion to ensure we don’t overdraw. Poor people overdraft their checking accounts. Don’t go there.
Money Market Account
Our emergency fund is in a money market account with our brokerage. We have check writing privileges, but I don’t think we’ve ever written a check from it. It is not with our normal savings and other “normal” accounts to make sure it stays a bit more out of reach. I want your emergency fund to be accessible, but not TOO accessible. Money Market accounts are almost as safe as standard checking/savings accounts but sometimes earn a better rate of return. The goal for us is still safety, not long-term gain.
Certificate of Deposit
We have zero CDs. While they are basically just a savings account, they do earn a little better interest. You can use them for your emergency fund, but they are my least favorite method of emergency saving because they do have a little bit of restriction. CDs are old school and don’t really do much for you…but they are safe and perform a little better than a savings/checking account.
Unless you want to speculate and “play” in the investment market, this is putting all your eggs in one basket and too risky. I don’t like single stocks/bonds because your success is literally tied to the success of a single company. Time and time again that has paid off for investors, and time and time again it has turned out terribly. I don’t buy single stocks/bonds.
For retirement and kids’ college savings, I LOVE mutual funds. You get most of the benefits of single stocks with a lot less risk. While it is much riskier than a savings account, it also can get you much larger returns, which is exactly what you’re looking for in long-term savings. Be careful though…don’t just pick one mutual fund – spread the money around a bit in that arena as well.
What It Really Comes Down To
If you’ll notice, I’ve not worried so much at the type of account as with the purpose of my savings. In other words, what do I want my money to be doing? Do I need it safe and immediately accessible? Do I want it to grow for the future? What is the purpose of that money?
Safe and Accessible
The best example of this is your emergency fund.” As I mentioned, our emergency fund is in a money market account, but a savings account, a CD or any other BORING, low/no-risk account is the perfect place to put your emergency fund (whether a small starting fund or the big, “I could make it if my job went away for a while” fund). Just keep it separate from your other monies and make sure it is somewhere safe (not under your mattress, for example).
Growing but Restricted
This is where your investments come in. You are willing/able to wait a few years in case the market takes a dip, like it tends to do periodically. I would never put my emergency fund, car savings, or any other similar savings I might need in a year or two in an “investment.” Think LONG TERM and you’re on the right track here.