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Short-Term vs. Long-Term Savings Strategies: What You Need to Know

Savings goals vary. Fortunately, you have options for the short- and long-term.

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Your savings strategy -- and the product you choose -- should match your financial goals. Saving for surprises, such as an unexpected car repair, is different from saving for a long-term goal such as purchasing real estate. Below we’ll cover the best financial tools for each. 

How to save for the short term

There are plenty of savings accounts designed for shorter time frames. A certificate of deposit or a high-yield savings account would be an appropriate choice for stashing cash to fund a big-ticket expense that’s anywhere between a month and three years away. Short-term CDs typically have terms of one year or more, during which time your money can’t be withdrawn until the CD matures. A high-yield savings account, however, will let you access your cash immediately or within a few days. A high annual percentage yield and low to no fees are two of the key criteria you should consider when evaluating a savings account. 

“For the short term, you’ll want an account that’s liquid so you can move money in and out of it easily,” says Chris Moore, director of deposit and payment product strategy for Alliant Credit Union. Moore, who specializes in savings products, added that you should make sure there are no fees for those transactions. “Being able to earn extra money in your account is always very important,” he says. 

The annual percentage yield on Alliant’s savings account is more than 10 times the national average of savings accounts, according to CNET’s sister site Bankrate.

When you’re saving for the short term, the priorities are mitigating risk -- you don’t want to lose money, after all -- and preserving access. A high-yield savings account should deliver on both counts. You should have mostly unfettered access to your cash (though some may limit how many transactions you can make in a month). And a federally insured bank or credit union that’s a member of the Federal Deposit Insurance Corporation or the National Credit Union Administration, respectively, your deposit is insured for up to $250,000 per person. Each type of savings account presents tradeoffs; here’s an overview of some of the major types:

  • High-yield savings accounts: Savings accounts are ideal to park a lump sum of money, but not all are created equal. High-yield savings accounts, for example, pay at least 18 times the national average of traditional savings accounts, according to Bankrate. As the Fed continues to raise interest rates, many banks are raising rates on savings accounts, currently as high as 4.00% and rising.

  • Short-term CDs and CD ladders: A CD is a savings account that earns interest on your stash of cash within a specified time period. This time-based account is offered at banks, credit unions and brokerage firms. You can purchase a CD for a specific length of time, or term, in which you agree not to withdraw your money from the account until its maturity date, otherwise you face an early-withdrawal penalty. In exchange, you can earn a higher, fixed-rate APY that pays out a consistent yield as opposed to a lower-earning savings account whose interest rate can move up or down based on the direction of the market. Short-term CDs typically have terms of one year or less.

    A CD ladder enables you to purchase CDs with different maturities so that you can have access to some of your money sooner, while also taking advantage of higher interest rates that are offered by longer-term CDs.

  • Money market accounts: A money market account is a type of savings account that earns interest and provides check-writing privileges and debit card access. Money market accounts typically offer higher interest rates than savings accounts, but they may also have higher minimum balance requirements. Money market accounts provide a safe way to grow your savings while providing access to your cash when needed.

  • Short-term bond funds: This type of fund holds a diversified selection of short-term bonds with maturities of between one and four years. Short-term bonds represent loans to issuers, be they companies or municipalities, that use bonds to raise money for projects. Short-term bond funds can provide investors with a way to generate a regular stream of income through the interest paid on the bonds in the fund. 

  • Fixed-income funds: These funds hold a diversified portfolio of securities, such as bonds and treasury bills, that have a defined maturity date. The value of a fixed-income fund is based on the value of the securities it holds, providing an investor with a way to diversify their portfolio and generate a regular stream of income through the interest paid on the securities in the fund. 

How to save for the long term

When you’re working toward longer-term goals of three years or more, consider savings options that provide higher growth rates. Some options, however, may present more risk of loss to your principal balance. Therefore, you’ll want to select the investments that best align with your financial goals and risk tolerance. Before making a decision, speak to a certified financial professional for advice on your financial circumstances.

  • Long-term CDs: These CDs generally require a time commitment of between three years and a decade. Long-term CDs typically have higher interest rates than short-term CDs as an incentive for the issuing bank or credit union to use your deposited funds longer. But long-term CDs tend to have higher early-withdrawal penalties than short-term CDs if you withdraw your money before maturity. Ultimately, long-term CDs are a safe way to save for future goals while enjoying fixed-rate growth.

  • Stocks: Stocks represent a unit of ownership, or share, in a company. You become a shareholder in the company when you purchase stock, sharing in the company’s profits or losses. A stock’s value will fluctuate based on a number of factors such as the company’s financial fundamentals (earnings), technical factors (trading activity) and market sentiment.

    Unlike deposit accounts such as CDs, stocks aren’t insured by the FDIC or NCUA. If a company’s stock value declines, the money invested isn’t protected and can be lost (then again, when the value of a stock rises, shareholders gain in the form of a higher share price). By working with a certified financial professional, you can minimize the risk of loss with careful portfolio planning and other strategies such as diversification. A financial pro can help you better understand your risk tolerance and highlight stocks or other investments with the potential for continued growth. Stocks have a higher risk of loss in exchange for higher growth compared with some other types of investments, such as bonds

  • 401(k)s and IRAs: These are retirement accounts that are designed to help you save for ongoing living expenses once you retire. A 401(k) is an employer-sponsored retirement account, while an IRA is an individual retirement account that you set up through a financial institution. A 401(k) allows you to contribute a portion of your salary before the money is taxed. An employer will often match your contribution, generally up to 6%.

    Setting up your 401(k) immediately and contributing at least enough to earn your company’s match is a great way to save for future expenses in retirement. IRA contributions have tax advantages depending on whether it’s a traditional, Simple or Roth IRA. Understand the income restrictions to ensure that you’re taking advantage of the best option.

  • 529 Plans: A 529 plan is an investment account designed to help families pay for a child’s college education. A 529 plan can be structured as either a prepaid tuition or a college savings plan. The money saved in a 529 plan grows tax-free and isn’t taxed when withdrawn if it’s used for approved educational expenses such as tuition or books. 

  • Index funds and ETFs: An index fund is a collection of stocks, bonds or other securities that imitates the portfolio and market weightings of a specific index such as the Standard & Poor’s 500-stock index, the Dow Jones Industrial Average or the Bloomberg US Aggregate Bond Index. An index tracks the performance of a portfolio of securities based on specific characteristics, be it a sector such as technology or consumer staples, or by market capitalization, just to name two.

    Index funds are a type of passive investing, meaning that they aren’t actively managed by a fund manager because the underlying assets are based on an established index.

    An ETF, or exchange-traded fund, is similar to a mutual fund but trades more like a stock -- meaning you can buy or sell shares of a fund at any point during the day. Mutual funds can be bought and sold in trade orders daily after market close. Index funds and ETFs enable you to diversify your investments and generally have lower fees than actively managed mutual funds.

5 steps to achieve your savings goals

  1. Create a monthly budget: Accounting for all income and expenses accurately is the first step to developing an effective savings strategy. Tools such as Mint and Personal Capital allow you to set up free budgets that can connect to your accounts and update each month automatically.
  2. Organize your savings goals: Compartmentalize your savings goals using supplemental subaccounts that operate like electronic envelopes such as those offered by Alliant Credit Union or Ally Bank.
  3. Look for additional income sources: Earning additional income will speed up your savings. CNET reviewed these great side hustles to help you generate more income. 
  4. Seek financial advice through your bank: Many banks and credit unions offer consultations with financial professionals to help you find the best savings strategy. Golden 1 Credit Union, for example, offers free instructor-led webcasts. Each session is 30 minutes and covers such topics as building a better budget and saving over the long term.
  5. Make your savings automatic: Whether you choose to save weekly or monthly, setting up automatic transfers will help you build a regular savings habit. This can be initiated with your employer through the direct deposit of your paychecks or at the account level. Your bank can help you establish regular transfers from a checking to a savings account. You can also transfer money to an external account to keep your savings out of sight and out of mind until you need it.

The bottom line

There are many products and services available to assist you in implementing an effective savings strategy. Setting up a twice monthly transfer of 10% of your paycheck into a savings account, for example, is a simple way to get the ball rolling. If your bank doesn’t offer high-yield deposit accounts, compare other options. Then start investigating the features available from long-term savings options. Meet with a representative from your bank to better understand the options available and which will best fit your future goals.

Toni Husbands is a staff writer with CNET Money who enjoys exploring topics that promote financial wellness. She began writing about personal finance to document her experience paying off $107,000 of debt, which is detailed in her book, The Great Debt Dump. Previously, she contributed as a freelance writer for websites, including, Centsai and Wisebread. She was also a regular contributor to Business AM TV, and her work has been featured on Yahoo News. Being a part-time real estate investor and amateur gardener also brings her joy.
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