Short-Term Savings Basics

Back in my first #Goals post, where I talked about my personal savings goals and where I stand, I mentioned that we have a big chunk of money in CD's. Why CDs? What are CDs? Read on!

After you've decided to get it together and get your money in order, you'll have all of these monies sitting around, so where should you put them? Do they even make giant bags with dollar signs on them anymore? There are many schools of thought on this, and rightly so. Personally, I like to look at my desired outcome when considering a first step. If you're baking a cake you need to set the oven to preheat before you crack the eggs, you feel me?

0-2 years
So you've got your checking account in the black and you've built up a mini-emergency fund. Where should you keep it? Attached to your checking account, but separate. The interest rates are non-existent and over time you'll actually lose money based on inflation vs interest, but! It's important to have an immediately accessible safety net to keep life from upsetting your apple cart. New tires, broken phones, a huge heating bill - these are all things that a mini-emergency fund can cover.

If you're working on building up your emergency fund (3-6 months worth of expenses) you need to know where to stash it. Somewhere easy to get to...but not too easy. A savings account with a different bank or a prepaid debit card that you keep at home are both good choices. I keep mine in an online savings account that has an OK interest rate and can transfer into my main checking account in 2 days.

Specific savings goals like college funds, weddings, vacations, etc. need special treatment. Think about when you'll want the money and go from there:

2-5 years
It's easier than ever to compare rates and match one with your savings goal. Sites like NerdWallet monitor CD rates and make it easy to choose a bank. Find one that works for your timeframe and like Ron Popiel said, set it and forget it!

I bonds are another good choice as they adjust with inflation, instead of against like so many low-interest savings accounts.

5+ years
This is where things get tricky. You can either have time or money, but you can't have both...unless you're willing to take on some risk. Index funds are traditionally low-risk and high-reward, but they take time. High-risk and low-reward options include buying a bunch of Beanie Babies and crossing your fingers (not recommended).

Investing in an 80/20 mix of stocks and bonds has historically shown an almost 10% increase in investments over a 15 year period. However, that is absolutely best left to professionals. If you are reading this site, chances are you are not a professional. Find one who doesn't work on commission and be totally honest about your goals.

If you want to go beyond living paycheck to paycheck and build real wealth, these are the things you need to think about. So boring, but so crucial.

Terms
Checking account: Come on, you know this one.
Savings account: Your bank should offer an array of no fee options. If they don't then find one that does.
Prepaid debit card: Look at the fees involved before you commit, but these are good option for hiding a big chunk of money from yourself until you need it.
Online savings: There are many options out there, find a no fee one that works for you. Personally, I like SmartyPig and have used them for years. I like the option to cash out your goal for more than it's worth if you take it in gift cards.
CD (Certificate of Deposit): With these you are essentially lending your own money to a bank and will get a little bit extra in return for your trouble. Usually very little, and the amount varies. You commit to a time frame and face penalty charges if you withdraw early. But it's safe!
I Bond: These are government bonds that work like a CD but have a fixed interest rate. These are perfect choice for college savings because you don't pay taxes on the interest if you use the money for higher education.
Index fund: These mimic the value of a particular group of stocks, an "index," like the Dow Jones Industrial. When the Dow rises, so does your Index fund so long as you've chosen one that follows that index. It's a bit confusing, but luckily there are a ton of people who are better at this than us and they want your money so they'll help you make some.
Beanie Babies: One of my nearest and dearest was once arrested for trying to steal a display of mini Beanies from a McDonald's.
Stock: Buying stock is buying a little part of a company. As the value of the company rises and falls, so does your little piece of it.
Bonds: You are basically lending a company money that they promise to repay you with interest.