To save up for a major purchase, there are several smart places to put your money, where it can remain safe and enjoy modest growth. Major goals that normally take years of saving include a down payment on a home, marriage, children, education, or starting a business. These aspirations are best achieved with help from solid, short to intermediate term investments. This means finding a vehicle for your money without much risk, unlike investments with a long-term horizon, such as retirement, where financial losses can usually be recovered and overtaken by profit over many decades.
The best place to keep money needed in five years or less is in an account where you can earn a little interest. Certificates of Deposit are a natural place. With CDs, you are loaning your money to a bank or other institution for a fixed period: one, two, five, or more years. In exchange, a set amount of interest is received, usually after compounding on a monthly or quarterly basis. Money from CDs can also be withdrawn, if absolutely necessary. Most banks attach a penalty fee or loss of interest for closing a CD early, but you can never lose the principal amount deposited. CDs, like savings and checking accounts, are subject to state and federal income taxes.
Higher yield accounts are another excellent option for keeping large blocks of money toward future goals. Money Market accounts work much like standard savings and checking accounts, but garner higher interest. They often require several thousand dollars to open, depending on the bank, and they work by investing funds in extremely low risk, short-term investments. High yield checking accounts available through banks, credit unions, or online institutions offer another avenue for boosting savings. Some accounts may even pay 4% – nearly ten times more than what is currently offered as a return on the average savings or checking account. However, high risk checking accounts usually require you to make a certain number of deposits per month, or meet their use quota by making purchases.
Finally, exploring bond markets offers a successful and fairly safe way for your savings to grow. You should always be extremely cautious about short-term bonds, though. Like any bonds, risk and reward are definite possibilities. Safe securities, such as federally issued I-Bonds or municipal bonds, are even tax exempt. This is a major advantage to these types of investments. When using bonds, investing for money that will be needed in ten years or less should be carefully planned, and then only if there is some tolerance for risk.
Creative savers may even wish to consider mixing all three of these methods. When it comes to saving as well as investing, diversification is always a plus. By placing large amounts of liquid money in the right place, your savings can enjoy a friendly nudge upward, while staying safe until it needs to be used.