Do This With Your Money for Short-Term Savings Goals

By Ellevest Team

Here at Ellevest, we’re all about investing toward your goals — the long-term ones, that is. After all, the stock market has returned an annual average of 10% since 1928. We typically recommend investing any money you won’t need for at least two years into a diversified investment portfolio.

But what about the money you’re going to need within the next two years? Where’s the best place to put that? Is one type of account better than others? These questions feel especially relevant given the current status of inflation (high) and the investment markets (volatile). But the answer to it all remains the same no matter what the economic climate is like: Save money for short-term financial goals somewhere safe while it earns the best interest rate possible.

The thing is, more interest can often mean less safe, and vice versa. So what should you do with your money for short-term savings goals? First, make sure your money is prepped for your situation.


Prep your money for short-term savings goals

  • Keep your emergency fund separate from other short-term financial goals. Doing this will give you a clear picture of how much you’ve reserved for your emergency fund — and make it less tempting to dip into it when you don’t really need it. But whether you choose to divide it up from your other short-term goals or not, your emergency fund should always be saved in an NCUA- or FDIC-insured account that you can easily access anytime. This isn’t money you want to lock up or take chances with, even if the risk is small. If you need it, it needs to be there. We recommend a high-yield savings account.

  • What are short-term financial goal examples? While we’re on the subject, emergency funds are a great example of a short-term financial goal. We recommend prioritizing to save at least one month’s worth of take-home pay before anything else. Then, keep adding to your emergency fund until it’s fully funded while you save for other short-term goals — anything within the next two years. Next summer’s vacation, a down payment on a car or security deposit on a new apartment, home improvements, debt or student loan repayments, wedding season purchases, holiday spending, and travel plans can all be short-term savings goals. 

  • Determine how much money you should keep in cash. Keeping the right amount in cash is equal parts smart money move and stress reliever. Once you’ve determined your short-term goals — and after you’ve started an emergency fund and created your monthly budget — calculate the amount you should have in the bank to hit them.

Choose the best account for your short-term savings goals

While so much depends on your situation, your goals, and your risk tolerance, we typically recommend savings accounts for short-term financial goals because they’re so safe, liquid, accessible, inexpensive, and simple.

That said, other account types could make sense in certain situations. Say you have a large sum that hits a minimum deposit requirement, and the high interest rate is worth the extra fees. Or, you know for sure you aren’t going to need the money until the term is up and you like the security of a fixed interest rate. It’s nuanced, but those details could help you save more (and more quickly). Here are our top five options for where to put your money for the short-term: savings accounts, money market accounts, money market funds, certificates of deposit (CDs), and government savings bonds.

  1. Savings accounts

A savings account is a type of bank account that incentivizes you to keep your money in there by paying interest on the balance. (Banks can afford to pay you interest because they use the cash you deposit to make loans to other people and banks, which they earn interest for.) A high-yield savings account is one that pays much more than the national average.

Pros of savings accounts

  • They’re safe. True savings accounts are FDIC-insured (or NCUA-insured, if they’re from a credit union). That means the government guarantees that your money is safe, up to the limit of $250,000.

  • They pay interest. The national average interest rate is currently 0.57%, but some high-yield accounts are paying as much as 5%. That rate often changes as the federal funds rate changes (especially for high-yield accounts), which is good when rates are rising.

  • They’re liquid. You can take your money out any time you want, usually via online transfer or sometimes ATM withdrawal.

  • They’re inexpensive and widely accessible. Savings accounts are available from pretty much any bank that offers deposit accounts, and it’s possible (and advisable!) to find savings accounts with no minimum account balances or monthly fees.

  • Some of them come with helpful features, like “envelopes” or “buckets” you can use to organize all your savings for different goals.

Cons of savings accounts

  • There are usually withdrawal limits. If you make more than six withdrawals a month, you may have to pay a penalty fee. (It used to be required by law, but that was suspended during the pandemic and some banks relaxed the rules.)

  • The interest rate can be relatively low. Especially if it’s not a high-yield savings account. Although of course, this depends on the account in question and what you’re comparing it to.

  • Rates are variable. Rates on savings accounts usually move in sync with federal funds rates. If the federal funds rate starts to go down, high-yield savings rates also go down. 

  1. Money market accounts

Also called a money market deposit account, MMAs are very similar to savings accounts. They’re also available from many banks, and they also pay interest and come with FDIC or NCUA insurance. The main differences are that MMAs may come with a debit card and the ability to write checks, and they often require a minimum balance and charge monthly fees.

Pros of money market accounts

  • They’re safe and liquid, just like a savings account.

  • They pay interest. Some accounts are currently paying up to 4.33% (but with minimum balance requirements).

  • They often make it even easier to access your money, with checks and an account debit card.

Cons of money market accounts

  • They typically have minimum account balances and monthly fees, especially if you want a higher interest rate.

  • There are withdrawal limits, just like with savings accounts — typically no more than six a month or you get hit with a penalty.

  1. Money market funds

Though they have almost the same name, money market funds — aka money market mutual funds — aren't to be confused with MMAs. That’s because MMFs are investment accounts, not bank accounts.

MMFs are usually invested in relatively safe investments, like US Treasury or bank debt securities. They’re one of the most conservative investments out there (plus new laws introduced in 2008 reduced their risk even further), but it’s important to know that they are not risk-free

Pros of money market funds

  • They may earn more than high-yield savings or MMAs, although not always. Historical MMF yields have been between 1% and 3%.

  • It’s not too difficult to access your money. You can often write checks or make electronic transfers, although there’s likely a minimum dollar amount.

  • Some MMFs invest in municipal bonds that have tax benefits, meaning the returns may be exempt from state or maybe federal income taxes.

Cons of money market funds

  • There’s risk. MMFs are investment accounts, and so they are not guaranteed. It’s relatively unlikely — but definitely not impossible — to lose money you put in.

  • They typically charge management fees, usually a small percentage of your account balance.

  • There may be a minimum account balance that you’re required to maintain.

  1. Certificates of deposit (CDs)

Certificates of deposit are bank products where you agree to deposit your money for a minimum amount of time, and in exchange they pay a certain amount of interest. For example, you might buy a 5-year CD — in that case, you wouldn’t be able to access your money for five years (at least, not without paying a penalty). You agree to the length of time and fixed interest rate before depositing your money — the most common lengths are three, six, nine, 12, 18, 24, 36, 48, and 60 months.

Also note: There are plenty of different kinds of CDs out there with different terms, so read the fine print.

Pros of certificates of deposit

  • They may pay higher interest rates, depending on how long you’re willing to lock up your money. Right now, 1-year CDs are paying around 4%. The longer your term, the higher your rate is likely to be.

  • They’re safe, either FDIC- or NCUA-insured. 

Cons of certificates of deposit

  • They aren’t liquid. Once you put your money in, you can’t access it without a penalty until the CD’s term is over.

  • The interest rates are fixed for the whole term, which means if rates get better when your money is locked up, you won’t benefit. (On the other hand, if we were in an economic environment where rates were falling instead of rising, this would move to the “pros” column.) 

  1. Savings bonds (Series EE bonds and Series I bonds)

There are two common types of government savings bonds: Series EE bonds and Series I bonds. They’re similar, but EE bonds tend to pay a fixed, very low rate, whereas I bonds pay a rate that’s part fixed, part variable and pegged to inflation (hence the “I” in the name). With inflation high right now, I bonds are paying 5.27%. We’ll focus on them below.

Pros of Series I bonds

  • The interest rate is high right now, at 5.27%.

  • They’re pretty darn safe, since they’re issued and backed by the US government.

  • They have tax benefits. Interest earned on I bonds is often exempt from state income taxes.

Cons of Series I bonds

  • They aren’t liquid. I bonds lock your money up for a minimum of 1 year, and if you withdraw your money before five years have passed, you sacrifice your last three months’ worth of interest.

  • The interest rate changes every six months, since their rate depends on inflation. That means you don’t know what the annualized interest rate will be beyond the first six months of your bond’s life — even though you can’t withdraw your money for at least one year.

  • There’s a limit to how much you can put in. You can buy a maximum of $10,000 in I bonds per year.

What matters most with short-term savings is that you’re choosing the option that meets your needs in the smartest, safest (and hopefully most interest-bearing) way. And, of course, that you’re saving up for those short-term goals at all. 

Want to know the best place to put your money for short-term savings? Book a complimentary 15-minute call with an Ellevest financial planner to work through your next financial move.


 © 2024 Ellevest, Inc. All Rights Reserved.

All opinions and views expressed by Ellevest are current as of the date of this writing, are for informational purposes only, and do not constitute or imply an endorsement of any third party’s products or services.

Information was obtained from third-party sources, which we believe to be reliable but are not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities, and should not be considered specific legal, investment, or tax advice.

The information provided does not take into account the specific objectives, financial situation, or particular needs of any specific person.

Investing entails risk, including the possible loss of principal, and past performance is not predictive of future results.

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