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Some investments are great for long-term saving. Retirement accounts, mutual funds and individual stocks, for example, all provide exposure to the stock market. That can generate nice returns over the long haul, but you'll have to deal with market ups and downs along the way. That's why these investments carry more risk. If you're saving for something that has a shorter time horizon, like a vacation or a home down payment, you want a steady ride—and the ability to withdraw your funds easily.
The best savings accounts for short-term goals include high-yield savings accounts, money market accounts and certificates of deposit (CDs). These all tend to offer better interest rates than traditional savings accounts.
High-Yield Savings Accounts
High-yield savings accounts tend to offer competitive annual percentage yields (APYs). This is how much you stand to earn in interest over the course of a year. At the time of this writing, some high-yield savings accounts offer APYs as high as 4.85%. That means you'll earn $48.50 for every $1,000 you have saved. With a high-yield savings account, you'll have relatively easy access to your money. Your funds are also insured by the Federal Deposit Corp. (FDIC) for up to $250,000 per depositor, per insured account type, per bank.
This all makes high-yield savings accounts a good place to save for short-term financial goals. They're available through brick-and-mortar banks and credit unions, though online banks typically offer the best rates. Just keep an eye out for potential drawbacks. Some financial institutions may charge fees or require a minimum opening deposit or minimum account balance. You may also be limited in how many free transfers and withdrawals you can make per month.
Find High-Yield Savings Accounts
Money Market Accounts
A money market account functions like a mix of a savings and checking account. You can access your funds with a checkbook or debit card, but you'll also earn interest—and it's typically much higher than traditional savings accounts. Some currently offer as much as 4.88%. Regular savings accounts, on the other hand, earn about 0.40%, according to the FDIC. The convenience, high earning potential and easy access to your money stand out for short-term saving. The ability to pay by check might also be appealing for some financial goals.
Money market accounts are available through traditional banks, credit unions and online banks. There are some caveats. Your financial institution may put a cap on how many convenient withdrawals you can make each month, which may include electronic transfers and debit and check transactions. You might also have to meet minimum balance requirements.
Certificates of Deposit (CDs)
With a CD account, you invest a certain amount of money into an interest-earning account for a predetermined amount of time that can range anywhere from one month to five years. Just keep in mind that tapping your funds before the account matures usually results in a penalty. The highest APYs are typically reserved for CDs with longer terms. Some rates may even exceed 5%.
CDs are available through online banks, traditional banks and credit unions. While liquidity can be limited, a CD barbell is one potential workaround. This strategy has you invest some cash in a long-term CD with a high APY and some in a short-term CD that won't tie up your money for too long. CD laddering is another option. This is when you distribute your money across multiple CDs, allowing you to stagger the terms. When done right, it can make your money continuously available on an ongoing basis.
Government Bonds
While these technically aren't savings accounts, the following government bonds might also deserve a spot on your radar for short-term saving.
Treasury Bills
Treasury bills are short-term government bonds. You're essentially loaning money to the government and are repaid with interest when the bill matures. Treasury bills, also known as T-bills, are sold in increments that range anywhere from four weeks to one year. The interest is the difference between what you paid for the bill and its face value when it matures. The average rate for a three-month T-bill is currently 5.16%. Since T-bills are backed by the federal government, they're considered very safe investments. You can purchase them through TreasuryDirect.gov.
Treasury Notes
If you're looking for a low-risk way to grow your money, Treasury notes may be worth exploring. They're provided by the U.S. government and pay a fixed interest rate every six months until they mature. Treasury note terms can last up to 10 years, but some are as short as two or three years. The purchase price can vary and may be less than, greater than or equal to the face value. The final price is determined by a Treasury note's annual rate of return and its coupon rate, which is the interest rate the bond actually pays.
The Bottom Line
Saving for short-term goals may require a different approach when compared to financial goals that have a longer time horizon. You'll ideally want to earn a competitive interest rate without making it too hard to access your money. Shoring up your credit health along the way is also key, especially if you'll be applying for a mortgage or other type of financing. Free credit monitoring with Experian can make it easy to stay on top of your credit report and credit score for when you do need to borrow money.