Where to Keep Short-Term Savings, Sorted by When You Need It

Where to Keep Short-Term Savings: The Short Answer

Where to keep short-term savings depends on how soon you might need the money. Emergency cash goes in an insured high-yield savings account. Here, insured means covered by the FDIC, the Federal Deposit Insurance Corporation. This US government agency repays eligible bank deposits up to a set limit if a bank fails.

Money for a known date fits a certificate of deposit (CD) or a Treasury bill that ends before that date. A CD is a bank deposit you agree to leave alone for a set term.

A Treasury bill, or T-bill, is a short loan to the US government. A CD and a T-bill are both safest when you hold them until they end. Cashing out early can cost you a penalty or a lower price.

Short-term savings means money you expect to spend within about two years. Think of a car repair fund, a wedding fund or a house down payment.

Not every saved dollar has the same job. Sort each dollar by when you might need it. The right place usually becomes clear.

Three Kinds of Short-Term Money, and the Questions That Sort Them

Short-term money sorts into three groups: emergency cash, planned expenses and flexible savings. Each one needs a different home. Picture a $1,500 vet bill tonight, a $3,000 tuition bill in eight months and a "someday" travel fund. One account can't serve all three well.

Three questions sort any goal:
How fast could I need this money?
How sure am I of the date?
How much would a loss hurt?

A simple rule follows from them. The less sure the date, the more access you need. The surer the date, the more you can lock the money up for a better rate. That's also how to decide where to put money for a house down payment. Start by asking how firm your closing date really is.

Is a High-Yield Savings Account Good for Short Term Savings?

Yes. A high-yield savings account is usually the best place to keep short-term savings, especially emergency cash. It is insured at a bank, and you can reach it in a few days. It usually pays more than a regular savings account.

APY is the yearly rate, counting interest earned on interest. Assume a 4% APY, which is a teaching number and not a current offer. Then $5,000 earns about $200 in a year.

The rate can drop at any time. Moving money to checking can take one to two business days. Some banks limit monthly withdrawals. A teaser rate can end after a few months, so check how long yours lasts.

Promo rates can still help you build a habit. USC is short for the University of Southern California, and Schaeffer is a research center there. USC Schaeffer reported a study of short-term, very high interest rates on bank savings. People who saved during the promotion kept new saving habits after the high rate ended. That study looked at low-income people trying to grow small businesses, so treat it as a clue, not a promise for your account.

Our guide on where to keep your emergency fund shows how to keep that cash separate and easy to reach.

What Is the Difference Between a Money Market Account and a Savings Account?

A money market account is a bank savings account that often comes with checks or a debit card. It may need a higher minimum balance. Both accounts are bank deposits, insured by the FDIC (Federal Deposit Insurance Corporation) up to the legal limit.

The FDIC, or Federal Deposit Insurance Corporation, is a US government agency. If a member bank fails, it repays eligible deposits up to a set limit. It covers bank deposits only, not investments.

Don't confuse it with a money market fund. A money market fund is an investment you buy at a brokerage. It isn't FDIC-insured. It aims to hold a steady value, but that isn't guaranteed.

For most people, a high-yield savings account is the simpler pick. Choose a money market account only if writing checks from savings would save you a transfer. Otherwise, compare rates, fees and minimums.

Either account can hold the cash for an emergency fund you build before retirement saving. Before you deposit, check the FDIC's own site to confirm the bank is insured and to see the current limit. Coverage generally applies per depositor, per bank and per ownership category. Your accounts in your name alone at one bank share one limit. Joint accounts you own with someone else fall in a separate category.

Our guide on how CDs and savings accounts share one FDIC limit shows how those balances add up. To see how single and joint accounts are treated, read whether two savings accounts at the same bank are FDIC insured.

Are Short-Term CDs a Good Place for Savings?

Yes, for a bill with a firm date. Emergency cash belongs somewhere easier to reach. A CD, or certificate of deposit, holds a set amount at a bank for a set time, called the term, at a fixed rate.

Suppose tuition is due in nine months. A six-month CD ends before the bill does. The rule is simple. Pick a term that ends before your earliest possible need.

Early withdrawals usually cost a penalty, which can wipe out your interest. Most CDs also accept only one deposit, as our guide on adding money to an existing CD explains. Compare short-term CD rates with your savings rate before you lock anything up.

Are Treasury Bills a Good Short Term Investment?

Yes, for money you need on a known date and won't touch before then. A Treasury bill, or T-bill, is a short loan to the US government. You buy it below face value and get the full face value when it ends. Suppose, as an assumed example, you pay $980 for a $1,000 bill. The $20 difference is your interest.

The US government backs T-bills. FDIC insurance does not cover them. Their interest is usually free of state and local income tax, though federal tax still applies. CD interest usually gets no such break, so the difference matters most if your state taxes income heavily.

Here is a made-up example with assumed numbers, not current offers. Say a one-year CD and a one-year T-bill both earn 4% on $10,000. Each pays $400 in interest. Assume your state tax rate is 9%.

On the CD, state tax takes $36, so you keep $364 before federal tax. On the T-bill, you keep the full $400 before federal tax. That $36 gap means a T-bill can come out ahead even when its quoted rate is a bit lower.

You can sell a T-bill early, but the price may be lower than you expect. Plan to hold each bill until it ends. You can buy T-bills through TreasuryDirect or a brokerage.

Where Should I Put Money I Need Within Two Years?

Put it where your balance won't drop before you need it. An insured savings account fits money you might need any day. A CD or T-bill fits money with a firm date, as long as you hold it until it ends. Stocks don't belong here, since they can fall right when the bill comes due.

Holding to the end is the catch. Break a CD early and the penalty can eat your interest. Sell a T-bill early and the price may be lower than you expect. If you're not sure of the date, keep that part of the money in savings.

Buying a house? Closing dates move. Suppose, as a made-up example, you have $30,000 and expect to close in about 12 months, give or take three. Keep $10,000 in high-yield savings in case closing comes early.

Put the rest in a ladder. That means CDs or T-bills ending at different times, so some cash frees up every few months. Here, $10,000 could end in six months and $10,000 in nine. If closing slips, roll each one into a short new term.

Is It Safe to Keep Short Term Savings in the Stock Market?

No. Stock prices can fall sharply in a single year. If you need the money soon, you may have to sell at a loss.

Suppose, as a made-up teaching example, you save $20,000 for a down payment. Then stock prices fall just before closing, and your fund is worth $16,000. That leaves a $4,000 gap.

That $4,000 loss is an assumed number, not a forecast. A higher return does not help if the money must be there on a fixed date. Stocks suit money you will not need for many years.

For a fixed date, a T-bill or CD that ends before closing often fits better. You give up some possible gain. In return, you know what the money will be worth on the day it ends.

A Worked Example: Where to Keep Short-Term Savings for Three Goals

Stocks can fall just before a bill is due, so this example leaves them out. Instead, each pot of money gets matched to its deadline. Here's a made-up example.

Maya keeps $15,000 in checking. It holds $5,000 for emergencies, $6,000 for a car in 10 months and $4,000 for anything. The emergency money moves to high-yield savings. The car money goes into a nine-month CD, which charges a fee for early withdrawal. The rest goes to a money market account.

Her furnace breaks in month four. She pays from savings, and the CD stays untouched.

A friend asks, "Why not use the CD for everything?" Maya says, "The furnace doesn't check my CD date."

How to Compare Accounts Beyond the Rate

Look past the rate to the rules that decide when you can reach your money. Check these before you open an account:

• Is it insured, and by whom?
• How many days does a transfer take?
• Is there a minimum balance, a monthly fee or an early withdrawal penalty?
• Is the rate a promo, and when does it end?

This is our opinion. We would pick the account whose access rules fit the money's job over the top rate. Here's why, with assumed numbers that are not current offers. Say a nine-month CD pays 4.5% and savings pays 4%.

On $6,000, that gap earns about $22.50 over nine months. Now say the early withdrawal penalty is three months of interest, or about $67.50. One broken CD wipes out three times the extra interest. So lock money in a CD only when you're very sure of the date.

Chasing every rate change also takes time and adds accounts to track.

For flexible savings, a slightly lower rate at your current bank can be the better deal. Our guide on what to do with emergency savings after you reach your goal covers where extra cash can go next.

Conclusion: Give Every Dollar a Job and a Date

Sort short-term money by when you might need it, not by which account pays the most. A top rate helps little if the cash is locked up when your car breaks down.

Emergency cash goes in insured high-yield savings you can reach any day. A planned bill, like tuition due next August, goes in a CD or T-bill that matures by then. A CD is a bank deposit you leave alone for a set term. A T-bill is a short loan to the US government.

Flexible savings fit a savings or money market account. Start by labeling each pot with its job and the earliest date you might need it. Then compare access, insurance and penalties before you open anything new.