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Keep money you need soon in a highly liquid account.
No financial goal is complete without a time horizon.
Knowing how long you have to reach your goal informs your savings strategy, including where to keep the money so you can preserve it or grow it.
The best place to keep money earmarked for specific financial goals - whether it's a down payment, travel, unexpected bills, retirement, or your kids' college education - ultimately depends on when you need it.
Here are some general guidelines to follow:
You need your money in 1 to 3 years
Money you need access to in the next few years is best kept in a highly liquid account, such as the following:
High-yield savings
A high-yield savings account is a deposit account that earns more interest than a checking or traditional savings account, but comes with the exact same features: accessibility, FDIC insurance, and no market risk. Some high-yield savings accounts limit withdrawals to six times per month.
The best high-yield savings accounts charge no monthly maintenance fees, so there's no outlay on the saver's end. The interest you earn - known as the annual percentage yield (APY) - will be deposited into your account on a monthly basis, adding to your balance and thereby increasing your next interest payment. Remember that any interest you earn is included in your gross income for tax purposes at the end of the year.
Money-market account
Money-market accounts are another type of savings account. They're not to be confused with money-market funds, which are a type of low-risk investment.
There's little difference between a high-yield savings account and a money-market account. Both typically come with low or zero monthly fees; relatively high interest rates, often above 2%; are FDIC insured up to $250,000 or more; and are smart options for storing savings you may need in short order.
CD
If your savings is already set aside and you don't need to contribute additional funds to reach your goal, a certificate of deposit, or CD, could be a good option.
A CD is yet another savings product. Unlike the others, however, it's best for storing money that you won't need until a predetermined date - i.e. not an emergency savings fund that you may need to tap unexpectedly.
CDs offer a fixed interest rate for a set period of time, usually ranging from three months to five years. If you decide to withdraw your money before the maturity date, you'll forfeit any interest earned up to that point, in most cases. If you don't want to tie up your money completely, but still want to earn a higher interest rate than a savings account, consider a no-penalty CD.
You need your money in 3 to 5 years
If your financial goal isn't in the near future, you can utilize a CD to lock in a growth rate that will likely keep up with inflation. If you're comfortable taking on some risk, you might consider investing in the market through a brokerage account.
CD
Again, a CD is best for money you don't need - or want - to get to quickly. In an effort to preserve your savings, a CD is a good way to create a barrier between your money and your impulse to spend.
Typically, the longer the term, the higher the interest rate you'll lock in. One downside to note, however, is that many CDs don't accept additional contributions after the initial funding period.
Brokerage account
When you have extra money sitting in your savings account that you don't need for a few years, it may be time to invest it. The opportunity cost of sitting out of the market is high, particularly if you're young.
The typical advice on the right timeline for investing is not to invest money you need in the next five years. Depending on your risk tolerance, however, three years may be enough time for your money to recover from a loss, barring a recession or an otherwise unusual downturn.
Historically, the stock market has returned an after-tax average of about 6% to 7% annually, which is many times over what your money could earn in a savings account. If your risk tolerance is low, stick to lower-risk investments, like bonds.
You need your money in 5 years or more
If your financial goal is more than five years away, you have a long-term horizon. That generally means you can afford some fluctuation in the interim if it leads to greater returns.
Brokerage account
The key to any type of long-term investment success is choosing an asset allocation that matches your risk tolerance and time horizon. Generally, a low risk tolerance will mean investing more in bonds and less in stocks or equities. If you want help coming up with a strategy that's specific to your goals, talk to a certified financial planner or investment adviser.
Retirement account
Most people need decades to save adequately for retirement.
Whether it's an employer-sponsored plan at work or an IRA, your retirement account is basically an investment account with tax benefits. When it comes to funding a multi-decade retirement, investing provides the only kind of growth your money requires.
Disclosure: This post is brought to you by the Personal Finance Insider team. We occasionally highlight financial products and services that can help you make smarter decisions with your money. We do not give investment advice or encourage you to adopt a certain investment strategy. What you decide to do with your money is up to you. If you take action based on one of our recommendations, we get a small share of the revenue from our commerce partners. This does not influence whether we feature a financial product or service. We operate independently from our advertising sales team.
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