There are multiple savings vehicles for which to park your money. However, depending on the purpose of the savings and the length between now and when you need to access it, you will want to choose different types of accounts. Let’s discuss some of the popular options and what they’re most useful for:
Checking Account: The majority of checking accounts don’t earn interest and are primarily used for daily spending and bill paying. If you automate the majority of these bills, you will also want to have a buffer in there to cover any unexpected or higher than normal withdrawals. Keep this buffer pretty low, as this money isn’t earning anything.
Savings Account: A traditional savings account typically has an interest rate of 1% or less, so this isn’t where you want to park most of your money, but it definitely has its place. This will be an account you can access quickly, so you’ll keep short term savings here -- like an emergency fund or travel savings, or maybe even a down payment for a home if you are purchasing soon.
CDs: Certificates of Deposit, or CDs, typically pay right around the same amount of interest as a savings account but are less liquid. Personally, I don’t recommend you park any of your money here, as there are better options.
Taxable Investment Accounts: There are a lot of different options for taxable investments -- like stocks, bonds, mutual funds, etc. -- and each have their place. Here are a couple of basic rules when it comes to taxable investment savings:
Don’t invest money you need in less than a year -- Trust me, short term capital gains tax is not your friend. Hold all investments at least a year if possible.
Understand the market is volatile -- It isn’t the best idea to put savings in here that you need at a particular point in time. The market could go way up or down from day to day, so only put flexible savings and money you can afford to lose in here.
401(k)s/IRAs: These are retirement accounts, so this is where the money for “Future You” will go. If you withdraw this money before the age of 59 ½, you will be penalized with both taxes and penalties. This is for long-term savings only.
The exception to this is a Roth IRA -- which you can draw principal from without penalties. It may be worth it to save for mid-term goals in your Roth IRA, like a down payment on a home, however, understand that you are limited on your contributions each year, and you can’t make up years.
Put your cash into the right account for your savings goals. Keep your short-term savings liquid and make sure your long-term savings is constantly making money. Happy saving!
