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Where To Put Your Money

People ask me this all the time: “Dave, I’m sick of getting a crappy one percent APY on the money in my savings account. How can I earn a better return?”

My response is always another question: “What’s the money for?”

Where you should save or invest your money depends entirely on when you need that money back. Fortunately, this can be simplified a bit:

Where to invest your money depends on how soon you'll need it back.
Let’s break this down.

MONEY YOU (MIGHT) NEED NOW

Your emergency savings (a rainy day fund for unexpected expenses, illnesses or job loss) belong in a regular old savings account. Online accounts pay slightly better than regular bank accounts, but this money isn’t for earning returns, it’s for:

  1. Security (in case you lose your job or get sick).
  2. Paying for stuff in the next year.

Warren Buffett has been known to keep a rainy day fund of around $20 billion. He’s hardly making anything on that cash in today’s economy, but in his own words, he sleeps well at night. Do this, and so will you.

MONEY YOU WILL NEED SOON

You’ve mastered personal finance 101 (a rainy day fund and the makings of a nest egg). Now, you want to save for the good stuff: a car, a house, a wedding, maybe a couple of kids, a bigger house, etc. But the more you save, the more it bothers you that your bank only pays you about 1% interest. Having not slept through all of Econ 101, you recall that inflation historically averages about 3%. What that means, of course, is that if you let your money sit in a savings account for several years, it will start evaporating right before your eyes. 

So when saving for purchases a year or more in the future,you want to move cash out of the bank and into an investment where your cash can grow. The downside, of course, is risk. If you don’t know what you’re doing (and even if you do), you could lose money.

Because of this risk, combined with the intimidation factor, most people do nothing. If they have money for mid-term goals, they let it rot in a savings account. If they haven’t yet saved the money, they spend it instead. What you will do (because you’re smarter than everybody else), is open up a brokerage account and pick one, two—or a few at most—low cost mutual funds that are widely diversified and include a healthy amount of bonds. Examples include Vanguard’s LifeStrategy Funds, broadly diversified mutual funds that are managed for risk depending on the time frame you select.

If even this seems like it involves too many decisions, consider Betterment. It’s a site that lets you invest in stocks and bonds in two steps: 1) Deposit money and 2) select the percentage of stocks and bonds you want. (Hint: For short-term periods, choose 50% bonds or more.)

MONEY YOU WILL NEED LATER (RETIREMENT)

If the money is for retirement, it belongs in an employer sponsored plan à la a 401(k) or 403(b) and a Roth IRA that’s invested in a mix of low-cost mutual funds or ETFs that index the overall markets. Investing for the really long term is easy. The basics are:

  • Choose funds that include stocks and bonds (when you’re young, mostly stocks).
  • Make contributions to your account every month or pay period to take advantage of dollar cost averaging.
  • Sell investments only as part of periodic re-balancing (when you look at your portfolio and make adjustments to ensure the right mix of stocks and bonds for your age).
  • Don’t withdraw money before you retire.

That’s really all there is to it.

A FINAL NOTE ABOUT THE STOCK MARKET

I was having lunch with a coworker recently when he turned to me and—without so much as a trace of humor—said: ”I’m going to cash out my 401(k) and put the money under my mattress or buy gold or something, I have absolutely no faith in the stock market.”

My friends’ extreme views are less about money than politics, so my arguments weren’t going to change his mind, but they underscore common sentiments that  the stock market is too volatile for Main Street investors. It’s easy, of course, to say “look at how crazy stocks have been recently”. But when you want the higher returns that come with investing in stock, that craziness is what you sign up for.

It’s true: The stock market is risky! But taking risks is what create rewards. That’s investing. That’s business. That’s life. The key in managing those risks is to not invest like an individual, not a multi-billion dollar hedge fund. Don’t take wild bets. Don’t make short term trades. Buy a mix of widely diversified stocks and bonds and get back to living life.

If this still makes you uncomfortable, there are alternatives to the stock market:

But all involve risk, and most take more know how, time and/or effort than picking a few mutual funds.

What about you? How do you invest money for the short- mid-, and long-terms differently?

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About David Weliver

David Weliver is the founding editor of Money Under 30. He's a cited authority on personal finance and the unique money issues we face during our first two decades as adults. He lives in Maine with his wife and two children.

Comments

  1. Great article on distributing your funds. I think this is a great idea. It helps people get past the idea of keeping it all in one place.

    • Laszlo Csemege says:

      In US is one bank trustfull only. Bank of Nort Dakota. Offshore is Cathedral Bank. Run by templars. Last year there was 12 prosent return. Now is 9. Offshore and properties out of US. US is high taxed country. I recomend as well Guernsey,Jersey and Isle of Man banx. Brunei is doing gr8 as well. Lowtax.org. Absolutelly do not put anything into 401k. Remember Enron. Corrupted politicians in tandem with banxters will ripp you off of everything what ye goty. They will take even your used underwear and will let you live in bushes as they do to vets. Dony worry, they are gonna do it.

      • Laszlo Csemege says:

        US is probably highest taxed country on the world. Averrage family pays more than 50 prosent of income as tax or intersests. Ye haven’t learned yet? The last decade di not wake ye up? There is no country on the world which has established income tax, sales tax, property tax and school tax together. Plus extreme predatory interests and school tuition. In reality there is not big deal how much one pays taxes but what you get. And rreality is that there is almost equal tax in western civilization. But Usaics get at least from it for sure. In Sweden is minimum wage dalr 18 per hour. Income tax is little bit higher but one gets free health care and free schooling from cradle 2 grave. There is no school tax for home owners and lot lower property tax. Except US property tax is counted by property size not value. One paid sales tax when bought house and that’s it. Property tax was set for maintenance of roads not punish homeowners. So property tax is counted by acreage of property. Usually is couple tens of dollars. Income of local governmet is from sales tax. This is insurance against lobyiing and corruption. In US middle class pays everything. Even rich use public property for their business they do not pay share of it. We pay for em. There is no restrictions where you asign kidz 2 school. One can choose any school all over. This school will get money for the kid. Government splits money by kidz and every kid get his money to school where parents decided to asign kid. No US style social engineering @ all. And one can study 4 lifetime for tax money. General healthcare is actually anticorporate insurance and is supporting smal businesses. This one of the reasons why US is @ tail for selfemployment. Indenpendent folx R not welcomed. Corporate rules Command and control or My way or highway apply in the states only. Like or not US is not safe 4 investment on our scale. It is bettr 2 look somewhere else.

  2. Many people are saving for retirement through an employer sponsored plan, but are at a loss for where or how to save elsewhere. Often the confusion about where or how to invest funds for an emergency savings account can lead to complete inaction. Sometimes the best advice is the simplest advice. Great article!

    • Laszlo Csemege says:

      Do not leave anything in US. Offshore is trendy and follow rich. Invest in poor countries for less money but higher expectancy. Eastern Europe, south america, Greece,Italy,Croatia. Invest only to real estate. No banx. Rent is going 2B retirement. Farmland,forrest,apartments,summer houses. Diversify,diversify,diversify,

  3. I think this is such a great post for young people who are starting to save. I’m one of them, and while I’ve seen many articles about the need for and where to place savings for retirement and an emergency fund, I was always at a loss as to what to do with other savings (for a house, wedding, all the stuff that comes with “growing up”). I knew that stocks by themselves would be too risky for my mid-term goals, but I wasn’t confident about investing in individual bonds. A mix of stocks and bonds in a mutual fund is a great balance, and the Vanguard funds make it easy and less scary to decide what to do with those savings funds. Thanks for providing some information about it!

  4. Love this break down. Thanks for sharing.

  5. For me its hard to see 11k sit earning 1% interest… but at the same time, its my emergency fund and thats just the way it needs to be… but to combat this, each month I take a $100 of our emergency fund and put it into a 60 month CD at 2% interest just to feel a little better. Its $1200 a year that will get a slightly better rate, and the amount will be replace from our tax return so our EF slowly grows with time… Worst case scenario we redeem the CD’s early and the extra interest earned is lost to the 6 month penalty… but the principle is still there.

    My husband and I also decided that next year we will max out my roth, but after that we will only put enough in his to equal 15% of of our total income with both Roths combined… and pay down out 5.25% mortgage because thats a for sure rate of return on our cash and our mortgage is small that we can’t itemize the interest.

  6. The Oil Barron In Training says:

    I take on more risk than the average person. I have a mix of mutual funds and individual stocks. I am 20% mutual fund, 75% stocks, and 5% in options. Being that I am 24, single, and debt free, I have the ability to take on this higher risk strategy. I am weird because I actually enjoy investing as a hobby. I take the time to do in-depth research and monitor my positions every day. Don’t get me wrong, I am not a professional investor, I have a day job as an engineer. I just know that my investment style requires homework on my end.

    I buy into the value investing model, as does Warren Buffet, which is very simple: buy undervalued stocks low and sell them high. As simple as that sounds, it requires discipline and the ability to overcome emotion. Most people lose out in the market because they buy during rallies and then panic when the market falls and sell. The are basically buying high and selling low.

    I have managed to make around 14% on my money since 2006. When everything peaked in early 2008 I sold, not at the absolute peak, but close. Since everything was so over valued, I moved my money to cash for 6 months. When everything dropped and people were panicking and selling, I was buying in 2009. It sounds simple but is hard to do.

    I guess what I am trying to get at is that there is another dimension to investing, which is effort. You should match your portfolio to how much effort you want to put forth. More aggressive styles, like mine, require more work (4-5 hrs per week). What Dave describes above is a great strategy if you want to put in minimal effort (4-5 hrs per year). Just remember that the harder you work, the more you earn. As I get older, get married, and buy a house I will tone down the risk in my portfolio, but for now I am earn’n and burn’n, snap’n necks and cashing checks.

  7. Great advice for savings and investing timeframes. My main issue is I know I’ll probably need money in the future but I don’t know what for or when exactly. So I have a fairly good balance in my emergency savings and am definately investing in a 401k for retirement. Everything else that I’m just not sure about I like to invest in dividend growth stocks. If I do think of a future money goal I evaluate how long off it is until I need the money and then begin a plan to save the money by then.

  8. Retired CPA says:

    Daniel, have you considered a Roth? The contributions remain available for emergency purposes.

  9. Stock.Investments says:

    Have you ever said, “If I had to do it all over again?” I’m referring to investments. The stock market is the fastest way for a person under 30 to build wealth is stocks. You are right on in your article referring to risk/reward. I started buying stocks at 22. The first company I bought was a utility stock that was undervalued paying a decent dividend. I sold it eight months later for twice what I paid. It was a risk but a low level of risk. I buy value stocks, REITs recently buying TWO Harbor (TWO) and Prospect Capital Corporation (PSEC) for whopping dividends, but while they are at a depressed share price. Insiders are buying them and paid more, so it makes them a value play for me. the rule of 72 makes my investments double at 7.2 percent interest for 10 years, but in this case they pay twice that dividend, so it will be four years or less. I also went into rental property, two properties in Sebring Florida which is still growing and property cost is low. I rent them out and they pay for themselves growing my wealth. I use a local rental management agency that charges 17% to take care of everything. They send me a copy of the lease and the checks. I do a lot of homework before buying. One I bought from an estate (no real estate) and the other from a private owner who has a small sign out. Both doubled in price in less than 7 years. Next, I invest in land. Rural areas around cities is what I look for and go to the Assessors office to find out who owns it. I then contact them face to face about selling. Every time they were willing to hold the mortgage and I rented the land to farmers who pay all the taxes and some or all of the monthly payment. I bought twelve acres in a prime growth area for $12000.00 The lots are now worth $40000.00 each. The land has 14 lots of frontage on two roads. You can use other peoples money to grow your wealth. Last, I give back. I believe that when you give back to soup kitchens, Salvation Army, Goodwill, and those in need, God will bless your finances. Sure, I made mistakes and bad investments, but I never make the same mistake twice. I don’t listen to brokers, investment bankers, or anyone that calls on the phone. I own no silver or gold nor will I. I do own some mutual funds that have a modest return over the years but not as aggressive as stocks. Then,I take a small amount of cash and go highly speculative on shares under $5, most under $2. I bought a small oil company at $1 that no one ever heard of. I noticed a lot of big buyers in Barrons. I bought 10000 shares, and they hit oil in Kazakistan, next to Exxon. It went ot $30 in two weeks. First lesson – stop losses. i watched it go up, and faster going down selling at $3. Hindsight! Best wishes investing….. if you have a good small company – share it with us here. You may work at a small company doing well – that’s a gift.

  10. Great idea to break down your choices into your expectations. Saving for a house is much different from saving for a computer, and it should be treated differently. The point is that you save – and this shows us how! Thanks.

  11. David M. Enrqiuez says:

    Hi

    I’m 21 years of age and i saved up 1100ish with a couple hundred in my checking.
    i still live at home and attend community college. no debt thankfully, but that’s because I’m scared to get a credit card. I know i need to build up credit but that’s another problem. My concern is that i feel like I’m not “doing good” financially.

    Basically, I’ve been looking at the Roth IRAs and want to invest in one. although I’m a little unsure how they really work. how does it make money in the money market? whats a good thing/company to invest in? i forget how the terms go, but should i have the brokers invest safely or fast (rough or i don’t know the technical term.)

    I don’t want do do cds because the outcome profit are ridiculously nothing.

    Any ideas or advice from personal experience on what i should do with my money?

  12. WAKE UP SHEEP says:

    I’m all in on Silver Bullion and have made 125K this year alone. Keep your money out of the banks they are all crooks. Take control of your assets by owning silver and gold bullion. Don’t be a sheeple.

  13. I just made 2 million dollars on an currency investment. What should I do to protect my money from the IRS getting more than 35%?

  14. great article! i’m a college graduate and this was very useful for me, thomas economides brooklyn new york

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