Where to Stash Money According to Financial Goals
Financial experts agree that saving money is essential for reaching your financial goals. If you want to achieve your financial dreams, you must invest for your future.
But you also need access to money today for living expenses, emergencies, and having some fun along the way.
You can save and invest your money in several places depending on your situation and financial goals.
For example, you might choose to keep some money safe in the bank while putting some money into stocks, real estate, or a business.
The key is finding the right mix of risk and return that suits you.
Short and Mid-Term Money Goals
Money you need for daily living, any expenditures you’re planning for in the next 1-2 years, and at least part of your emergency fund need to remain as safe as possible.
And financial goals with a 3-5 year timeline, including eliminating debt, paying for a wedding, buying a home, starting a business, etc., should also carry minimal risk.
Stash these funds in financial tools such as:
1. Checking and Savings Accounts: These accounts offer low interest rates but are easy to access and manage. Consider an online bank such as Ally or Capital One for higher yields and versatility.
2. Money Market Accounts: These accounts pay slightly more than checking accounts but still offer lower rates than traditional CDs. They can be used like cash or invested in stocks, bonds, mutual funds, ETFs, or even cryptocurrencies.
3. Certificates of Deposit (CD): These are similar to money market accounts, except they usually come with a longer term. You can use them as short-term savings vehicles or longer-term investments.
4. Treasury Bills: These bills are issued by the U.S. government and pay a fixed interest rate. Unlike other forms of paper currency, treasury bills don’t fluctuate in value.
5. Short Term Bonds: These are sold by private companies instead of the federal government. Like treasury bills, their prices and yields vary based on supply and demand.
6. Health Savings Account (HSA): An HSA allows you to put pretax dollars toward medical costs if you’re covered by a high deductible health plan. You can then use the tax free savings to pay for eligible out of pocket healthcare expenses.
Long Term Financial Goals
The money you won’t need for years to come, i.e., college savings or retirement funds, can assume more risk. You can use the following types of accounts to access a variety of investments that offer more rewards with greater risk.
Traditional or Roth IRA: These retirement savings accounts offer tax benefits and allow you to contribute a maximum amount per year of $6,000 in 2022, or $7,000 for those over 50. They’re designed to grow over time, so you don’t have to worry about losing all your money when markets go down.
401k Plan or 403(b): These plans are offered through employers and work similarly to IRAs. Contributions are made to traditional plans using pretax dollars and may be limited based on income. Some employers also offer Roth options allowing you to invest after tax money, which means the contributions won’t lower your taxes in the year of contribution but will allow for tax free withdrawals in retirement.
Brokerage Accounts: These account types are designed for investors who want to build wealth outside their retirement accounts. They typically offer higher returns and less oversight from brokers than other investment accounts. However, there’s no guarantee that you’ll make back what you invest.
With these accounts, you can choose to invest in:
1. Long Term Bonds: These typically pay higher interest rates than regular bonds, but there’s a greater chance of losing money, so make sure you understand the risk.
2. Individual Stocks: Investing in individual stocks is risky because it requires research and understanding of the companies you’re investing in. If you decide to invest this way, consider starting small and building up slowly.
3. Mutual Funds: This option allows for purchasing stocks in various companies within one fund; this can make diversification easier, which helps reduce risk.
4. Stock Index Funds: These funds track an entire stock market, such as the S&P 500. They’re easy to buy and manage and may (or not) provide as much return as actively managed mutual funds.
5. Real Estate Investment Trusts (REITs): REITs are publicly traded real estate investment trusts. They’re passive real estate investments that tend to focus on one type of property, like apartment buildings or shopping centers.
6. Gold & Silver: While gold has historically been used as a form of currency, its price is volatile and subject to inflation. For this reason, many experts recommend holding physical bullion instead of paper certificates.
7. Real Estate: Owning commercial rental properties or homes is another excellent way to earn passive income. But there is a lot to learn before becoming a landlord so do your homework.
8. Businesses: Becoming an entrepreneur allows you to leverage your knowledge and expertise to generate income. But keep in mind most businesses fail, so you could lose your entire initial investment.
9. Cryptocurrencies: These digital currencies aren’t regulated by any government agencies, so they can fluctuate wildly in value. That said, some people believe they could replace fiat currency someday. Proceed with caution.
10. Other Alternative Investments: There are dozens of alternative investments out there, from crowdfunding to tax liens, each has its pros and cons.
Saving or Investing?
In the short term, you want your money safe and accessible. The cash you’ll need between today and the next few years will be better off in a boring savings account or CD.
You’ll want to stash any funds you won’t need to access for at least five years in investment vehicles such as stocks, bonds, or real estate. So, for the long term, aim to find an asset class that offers high returns and low volatility to help you build wealth over time.
Next: Investing is a Long Game
