If you have a savings goal that’s coming up in the not too distant future — such as the downpayment on a home, a bathroom reno, or plumping up an emergency fund — you may want to consider some good short-term savings options.
There isn’t a hard and fast definition of short-term savings, but it’s typically considered to be money you want to use in five years or less.
While there are a number of options for short-term savings, one of the best places to start stashing cash for a short-term goal can be a savings account. They can offer safety (so you shouldn’t lose any money), liquidity (allowing you to access money when needed), and growth (meaning they are interest-bearing).
But some of these accounts offer more liquidity and higher interest than others. With a little reading and research, you can start socking your cash away in the right place — and start moving closer to those short-term savings goals.
Should You Invest Short-Term Savings?
Depending on your short-term savings goals, a savings account may be a wise move. One significant downside to any cash savings account is that they tend to have relatively low-interest rates.
You might however wonder: Should I invest this money in stocks or a mutual fund in order to meet my short-term goals more quickly?
Generally speaking, for short-term money, your goal is not necessarily to maximize returns. It is to control the risk — to keep it safe — so that the money is available when it’s needed.
While everyone’s risk tolerance is different, the downside to investing in the market is that you might lose money in the short term. Investment returns start to “smooth out,” or return their average yield, over longer periods. Shorter periods tend to be volatile and unpredictable — especially in the stock market.
To invest in the short-term would require complete flexibility — if the market were to fall steeply, it would likely be best to wait it out and avoid realizing losses. Suddenly, you’re on the market’s timeline, not your own.
Because of this, these investments may be inappropriate for an emergency fund, which needs to be accessible at all times. The same goes for those financial goals with a hard deadline (such as wanting to use this money as a down payment in two years).
That said, there’s a trade-off. Many of the options for short-term savings may not keep up with increasing prices or inflation and its impact on cost of living. For money that isn’t needed for many years to come, it can be a smart idea to consider investing to grow beyond inflation.
If you’d prefer to avoid risk with your short-term savings, here are options to consider.
Recommended: 5 Types of Savings You Should Consider Having
Option 1: Online Savings Account
Online-only savings accounts, also sometimes referred to as high-yield savings accounts, are an increasingly popular option for short-term savings. As their name implies, these banks or financial institutions only operate online. Here’s the scoop:
• That means no brick-and-mortar locations and no chatting up a banker face-to-face with employees. The upside: When you compare accounts offered by traditional banks vs. online banks, the latter typically pass the savings onto their clients in the form of a higher annual percentage yield (APY).
• A potentially higher rate of interest isn’t the only reason to use online-only savings accounts. The websites and mobile apps for online accounts essentially serve as storefronts, so online financial institutions often devote lots of resources to make sure they’re optimized and easy to navigate.
• Additionally, many online-only institutions don’t have monthly account fees, which can be a real burden for those at the start of their savings journey. (For example, some traditional banks might charge a fee when you balance drops below the minimum.)
• Banking online doesn’t mean you have to forgo the conveniences of your neighborhood bank. You can typically still do all of the important banking duties, such as depositing checks (via mobile deposit, or snapping a picture of the check on your phone), moving money back and forth between accounts, and speaking with a customer service rep.
In the past, most online savings accounts were required by the Federal Reserve to limit withdrawals to six times per month. These rules are evolving; post-pandemic, some banks dropped this rule. Before you sign up, you’ll want to understand the rules for accessing your money.
Also, while online banking is now considered mainstream, it’s always smart to do a little background research before you open an online account. You may want to check, for instance, to make sure an institution has Federal Deposit Insurance Corp (FDIC) coverage, a government-guaranteed program that protects your money.
Option 2: Certificate of Deposit
A certificate of deposit (CD) is a savings account that holds a specific and fixed amount of money, and for a designated period of time, such as six months or three years. In exchange for the deposit, the bank pays a fixed rate of interest.
Generally, CDs with longer maturities offer higher interest rates. For example, a bank is typically going to be willing to pay more for a deposit that’s guaranteed for five years as compared to three months.
As a saver, you often get more rewards for the risk.
You may also want to keep in mind that the interest rate on a CD is locked in at the point of purchase, as opposed to the interest rate in a savings account (both traditional and online-only), which may fluctuate.
If you’re interested in locking in a certain rate, you may want to consider a CD. (Although be aware that you would be locking yourself into a lower rate, if rates rise.)
While savings accounts are designed to provide regular access to your money, CDs are not. Because CDs have a fixed timeframe, there may be a penalty to access the money before the period is over. And in exchange for the lock-up period, you may find that financial institutions pay slightly more interest than online-only savings accounts.
CDs can be a good option for people who don’t need to touch their short-term savings for a certain period of time. And they are typically FDIC-insured.
Option 3: Money Market Account
A money market account (MMA) is like a mix between a savings and a checking account.
These accounts, offered by banks and credit unions, can allow you to write checks (though you may be limited on how often) and may also have a debit card. (Savings accounts, whether online or at a traditional bank, typically do not allow for check-writing.
Returns on these accounts often beat those on traditional savings accounts. Depending on what’s happening in the economy overall, an MMA may be in line with that of an online-only bank account.
However, MMAs sometimes require higher minimum balances than other types of savings accounts. So, this might be a better option for those with more money to save.
MMAs are considered a safe choice since, like other types of savings accounts, they are typically covered by FDIC if held by a bank, and National Credit Union Administration (NCUA), if held by a credit union. (Although, it’s always a good idea to double-check insurance coverage to be sure.)
Keep in mind that MMAs differ from money market mutual funds, which are not FDIC- or NCUA-insured.
Option 4: Cash Management Account
A cash management account (CMA) is a cash account offered by a financial institution other than a bank or credit union. These accounts are designed to merge the services and features of checking, savings, and investment accounts, all into one offering.
While CMAs are typically offered by financial service providers that are not themselves technically classified as banks, they are still usually covered by FDIC deposit insurance like regular bank deposits — often through a partner bank.
Generally, CMAs function similarly to a traditional checking account, yet pay interest that is often higher than most savings accounts.
Some brokerage firms require a large minimum deposit to open a CMA, or may charge monthly fees for anyone under that minimum. Before opening a checking and savings account, it’s a good idea to ask about monthly fees and minimum balance requirements.
Also, since checking and savings account providers automatically “sweep” your unused cash into investments that pay dividends or interest (which maximizes the account’s profitability), you may want to make sure those sweep accounts are low-risk or FDIC-insured.
The Takeaway
Short-term savings is money that you likely will need in the not too-distant future, such as within two to five years.
There are a number of options for short-term savings, but some of the safest bets include online savings accounts and CDs, among others. These accounts tend to be low-risk, typically allow you to have access to your money when you need it, and can offer a higher return than a traditional savings or checking account.
If you’re saving for a large purchase (perhaps a wedding or a down payment on a home, consider signing up for a high yield bank account. SoFi’s Checks and Savings Account offers a competitive APY, charges no account fees, and let’s you spend and save in one convenient place.
Start working towards those short-terms savings goals today!
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SoFi members with direct deposit can earn up to 4.20% annual percentage yield (APY) interest on Savings account balances (including Vaults) and up to 1.20% APY on Checking account balances. There is no minimum direct deposit amount required to qualify for these rates. Members without direct deposit will earn 1.20% APY on all account balances in Checking and Savings (including Vaults). Interest rates are variable and subject to change at any time. These rates are current as of 4/25/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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