Another question that was asked recently on SaveUp’s Facebook page is “Where is the best place or way to save money other than traditional savings accounts?” Hint: the answer isn’t “under your bed!”
If I were all about chasing returns, which is not my investment philosophy, I’d have a one-size-fits-all answer to this question. A quick aside: more information about my investment philosophy is covered on the FAQ page of my website (scroll down to the second to the last question). Instead, it’s important to know the purpose of these funds and also consider the other financial decisions you are making.
Do you have an emergency fund in place?
If you’ve read previous posts, you probably knew I’d ask this question. Having an emergency fund is very important, and I emphasize it often. This should stay in a savings account so that funds are accessible. Three to six months of expenses is the general rule of thumb. If you want to get the most out of your savings account, NerdWallet has a comparison tool which can help you find competitive savings accounts.
Do you have a retirement account?
If so, how much are you contributing to it? Perhaps you would benefit from putting some (or all, depending on the amount) of these funds into a retirement account that has tax benefits. Consider increasing the contributions if you have an existing account and make sure they are invested accordingly. Also, be aware of IRS contribution limits which vary depending on the type of retirement account you have. You can read more about different retirement accounts in our past posts.
What is the purpose of these funds, and when do you plan on using them?
Having a purpose and a timeline are two critical components to choosing an appropriate investment and account type. I dive into more detail on appropriate investing in this post on portfolio diversification.
Is this for your child’s college in 15 years? Maybe we’d consider a 529 account and choose investments in line with your personal risk tolerance, as well as the 15 year time horizon. Or are these funds for the downpayment for a new house in two years? We’ll probably want to be conservative and look at CDs or other short term debt instruments. Perhaps you want to set these funds aside for retirement (in 20 or 30 years) in addition to your other retirement accounts? We might consider opening a brokerage account and creating a diversified portfolio with an aggressive asset allocation.
It’s fantastic that you have money saved. Keep that up! The next step is to figure out the purpose for those funds in order to invest appropriately for your goals and SaveUp!
This post was written by SaveUp’s personal finance contributing writer, Catherine Hawley, CFP®.
Image source: CNN Money