If you have a large but not immediate savings goal—such as the downpayment on a home, a kitchen reno, or an emergency fund—you may want to consider some good short-term savings options.
While there is no formal definition of short-term savings, it’s generally considered to be money you want to use in less than five years.
There are a number of options for short-term savings, but one of the best places to start saving up for a short-term financial goal is a savings account (of which there are several to choose from, all with different pros and cons).
Savings accounts typically have the key features people are looking for when saving for the short-term—safety (meaning you shouldn’t lose any money), liquidity (meaning you can access your money when you need it), and growth (meaning interest-bearing).
But some savings accounts offer more liquidity and higher interest rates than others.
With a little knowledge, however, you can start socking your money away in the right place—and start moving closer to those short-term savings goals.
Recommended: 5 Types of Savings You Should Consider Having
Should you invest short-term savings?
One significant downside to any cash savings account is that they tend to have relatively low-interest rates.
Which could make you 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 takes a steep nosedive, 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. 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.
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.
That means no brick and mortar locations and no chatting up a banker face to face. It could also mean less business costs and overhead and therefore, higher rates of interest paid.
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 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 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 continually evolving, however, so 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, how long the online institution has been around, and also make sure they have 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 typically best 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 account 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, when you put money in a cash management account, it earns money (often through low-risk investing that is done automatically), while you can also access it for your daily spending.
This allows CMAs to 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 cash management account, it’s a good idea to ask about monthly fees and minimum balance requirements.
Also, since cash management 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.
For people who are interested in streamlining their accounts, as well as saving for a short-term goal, a CMA can be a good option.
The Takeaway
Short-terms savings is money that you likely will need in the not too-distant future, such as two to five years.
There are a number of options for short-terms savings, but some of the safest bets include online savings accounts, CDs, money market accounts, and cash management accounts.
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.
No matter which short-term savings option you choose, the most important thing is that you find something that suits you—and that you use it!
Saving up for a large purchase, a wedding, or downpayment on a home? Consider signing up for a SoFi Money® cash management account.
With SoFi Money Vaults, you can separate your spending from your savings while still earning interest on all your money.
Vaults also allow you to track your savings progress and set up recurring monthly deposits (which could help you reach your savings goal more quickly). Plus, there are no account or minimum balance fees.
SoFi Money®
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