Where Can Significant Short-Term Savings Be Saved?
If you have a significant amount of savings that you plan to use as a down payment in a few years, where do you keep it? This is what we are reviewing this week.
Every Monday, we address one of your pressing personal finance questions by seeking advice from several financial experts. If you have a general question or money issue, or just want to talk about something PeFi-related, leave it in the comments or email me at [email protected].
This week’s question comes from Alex:
Where can I keep my money if I want to use it somewhere for one to five years for a major purchase? As a down payment on a house or boat. Non-401 (k) money. From 30 to 100 thousand dollars.
This is what individual experts usually say about an issue that affects each person differently: if you need personalized advice, you should see a financial planner.
Use your low-risk options
When it comes to short-term savings, you’ll want to hide them somewhere low-risk and easily accessible – a big tax headache or additional fees when you buy a house (or boat) are the latter. the thing you want.
However, Michael Ciccone, NJ Certified Financial Planner, says the first question is to ask yourself “if, in the hope of higher returns, [you] are willing to accept any chance you end up with less money than [ you] started with “.
Otherwise, you’ll want to stick with these low-risk, guaranteed-return options.
Justin Sullivan, Certified Financial Planner and Director of the South East Investment Market at PNC Wealth Management , offers a money market account. “As the Federal Reserve steadily raises interest rates , savers receive higher returns on their money market accounts than in previous years,” he says.
Money market accounts (which are different from money market funds ) can be accessed on a daily basis, they are quite safe investments and you can find one that is FDIC insured.
If you have a more specific time frame (for example, you know you will need the money in five years), Sullivan says “high quality bonds” are also an option. You can choose a bond with a maturity equal to the time you need to invest. “Using government or municipal bonds can be even more beneficial as they can provide duty-free interest as you set aside money for your big purchase,” he says.
There are also high yielding savings accounts (you can find one with slightly higher rates than money market accounts), CDs, and other short-term fixed income instruments that would benefit from the Fed’s rate hike as well.
What you probably don’t want to do: Buy stocks. “They can be volatile, and while they can be highly profitable in the long run, they often suffer long periods of loss,” Sullivan says.
If, according to Ciccone, you don’t mind a little risk and you’re on a five-year chart. “On a five-year horizon, this is a bit like a toss, but more aggressive investors may want to set aside about 30 percent of the total for stocks and reduce that amount by 10 percent each year until it is 100 percent focused on safe stocks. investment for two years in advance, ”he says.
Keep in mind that “you might lose a little possible performance doing things this way, but when you have a specific goal and time frame, you cannot count on the stock market to help you,” says Ciccone. “A late stock market correction or recession can derail your home buying plans.”