Where Should You Keep Significant Short Term Savings? – Info Computing

If you have a significant amount of savings you plan to use as a down payment in a few years, where do you keep it? That’s what we’re considering this week.

Each Monday we’re tackling one of your pressing personal finance questions by asking a handful of money experts for their advice. If you have a general question or money concern, or just want to talk about something PeFi-related, leave it in the comments or email me at alicia.adamczyk@lifehacker.com.

This week’s question comes from Alex:

Where should I park my money if I want to use it anywhere within one and five years, for a big purchase? Like a down payment for a house or a boat. Non-401(k) money. Anywhere from $30,000 to $100,000.

This is what individual experts have to say generally about an issue that affects each person differently—if you want personalized advice you should see a financial planner.

Embrace Your Low-Risk Options

When it comes to short term savings, you’re going to want to stash them somewhere that’s low risk and easily accessible—a big tax headache or added fees when you’re in the process of buying a home (or boat) is the last thing you want.

That said, Michael Ciccone, a New Jersey-based Certified Financial Planner, says the first question to ask yourself is “if, in the hopes of better returns, [you] are willing to take any chance of ending up with less money than [you] started with.”

If you’re not, then you’re going to want to stick to those low-risk, guaranteed returns options.

Justin Sullivan, a certified financial planner and Investment Market Director, Southeast, at PNC Wealth Management, suggests a money market account. “With the Federal Reserve steadily raising interest rates, savers are being rewarded with higher yields on their money market accounts compared to previous years,” he says.

Money market accounts (which are different from money market funds) can be accessed daily, are fairly safe investments and you can find one that’s FDIC-insured.

If you have a more specific time frame in mind (like you know you’ll want the money in five years), Sullivan says “high quality bonds” are also an option. You can select a bond that matures in the amount of time you have to invest. “Using government or municipal bonds can be even more beneficial as they can provide tax-free interest as you save for your big purchase,” he says.

There are also high yield savings accounts (you can find one with slightly higher rates than the money market accounts), CDs, and other short-term fixed income instruments, which will also benefit from the Fed raising rates.

What you probably don’t want to do: Buy stocks. “They can be volatile and though over the long term they can produce high returns, they often experience extended periods of losses along the way,” says Sullivan.

Unless, according to Ciccone, you don’t mind a little risk, and you’re on the five year timeline. “At a five year horizon, it’s a bit of a toss-up, but more aggressive investors might want to allocate perhaps 30 percent of the total towards stocks, and reduce that amount by 10 percent each year until it is 100 percent allocated to safe investments by two years out,” he says.

Just be warned, “you might be giving up a bit of possible performance by doing things this way, but when you have a specific goal and timeframe in mind, you can’t rely on the stock market to accommodate you,” says Ciccone. “A badly timed stock market correction or recession could derail your home-buying plans.”