You’ve worked hard to get your finances to where they are now, and you’re not about to stop contributing to that 401(k) or building your emergency fund. But, you can also dream of a trip to Thailand or a down payment on that new condo with a killer view. The Nav.it money app has a great feature that will help you automate your savings for a travel fund.
Navigating your finances means setting aside money each month for long-term goals and letting your spare change do some heavy lifting for you by investing in the short-term.
Long- vs. Short-Term Investing
Your savings time frame matters HUGELY when it comes to investing. Your strategy for the short term (one to three years) will be very different from your long-term (10-30-year) strategy.
The reason is simple. Most long-term investments, like stocks and stock-based funds, tend to be too risky for short-term objectives. Stock markets rise and fall, and if you’re unlucky enough to need the cash when the market tanks, you’re out that money.
Many funds also require lock-up periods of months or even years, during which you may not be allowed to withdraw your money without a stiff penalty. Ouch.
So what should I invest in?
High yield savings account
Say it with me, high yield savings. Traditional savings accounts don’t pay much interest, but their online cousins do. In fact, some online banks offer significantly higher-yielding savings accounts than their brick-and-mortar counterparts. For example, 2-3% interest payments as opposed to 0.01% from a big bank.
And yes, they’re perfectly safe, as long as they’re FDIC-insured. The Federal Deposit Insurance Corporation (FDIC) always protects your original principal. That means you’re guaranteed to have at least the amount you put in and will likely also receive a small risk-free return.
Is that my only option?
No, Navigator, it’s not. The world is your financial oyster. You could also try the following.
Certificates of deposit (CDs)
Banks often allow depositors to invest their cash for a specific length of time in a special deposit account called a certificate of deposit. CDs have a variety of terms ranging from three months to five years. You’ll earn a higher rate the longer you’re willing to lock up your money.
The downside is that once you choose a deposit term, you are required to keep your money in the account or pay a steep fee for early withdrawal—kind of like a 401(k).
Money market accounts
Money market accounts are based on your account balance, not the length of time you invest your money. They provide a slightly higher rate than a savings account, generally paying a rate similar to a CD. You’ll get an ATM card, checks, and deposit slips with a money market account. But, you will likely be limited in how many transactions you can make per month.
The perk? If you find a better rate elsewhere, you can transfer your money from the money market without paying the penalty for early withdrawal.
Oh yeah, and don’t forget about:
Short-term bond funds
These are usually only managed by a professional financial advisor. Bonds are generally not as stable as money markets, but they offer a higher return potential as their value fluctuates with market conditions.
The trade-off here is that you won’t have FDIC protection on your money, and you will likely need to meet a minimum investment requirement.
Peer-to-peer lending websites
Websites such as these connect investors to qualified customers in need of a loan—essentially allowing investors to become the bank. In return, investors receive a monthly income from loan repayment or interest.
With this option, you can start small and increase the amount of money you are willing to lend as your confidence grows. Depending on the website, loans may vary from a few hundred dollars to tens of thousands.
We’re changing the narrative around money but change can’t happen with a one-sided conversation. That’s why we’re excited to bring different voices and experts to share their wisdom. Send us an email and let us know what you think. And remember the nav.it money app offers you free tools for checking in and managing your money moves.
— Hey Navigator, just so you know, we have financial advisors reviewing our content, but our articles are only meant to be educational. Consider this friendly information, not financial advice (talk to a professional for that!).