Are you saving up to buy a home? To go on the mission field? To buy into a business? There are a lot of different reasons behind mid-term savings goals, those goals that take 3-5 years to achieve. No matter the reason you’re saving, everyone always ends up asking: what do I do with the money in the meantime?

 

For short-term goals, like a vacation or car repair, it’s obvious to just keep the money in your savings account. With long-term goals, like retirement, you often invest in stocks and bonds, knowing that even if the markets go down you will have time to make up the difference.

 

But what about mid-term goals? It seems a waste to have so much money sitting in a savings account for so long, but the stock market seems way too risky. What should you do? What can you do?

 

Assess Your Situation

Before we jump into investment options, we need a little bit more information. How you answer the following questions will help determine which savings vehicle is best for you:

 

• Is your time frame fixed or flexible?
• Do you need a specific amount of money or can it vary?
• How important is this compared to your other financial and life goals?
• Will you earn enough money to reach your goal or do you need the money to earn interest?
• How would you handle losing some of this money?

 

The answers to those questions will help you determine your time frame, how flexible the goal is, its level of importance, and how much risk you would be willing to take with it. That, in turn, will dictate which of the following options is best for you in this situation.

 

Where To Put The Money

High-Yield Savings Account

The most conservative, i.e. “safest,” option is to keep your money in a high-yield savings account. Right now (September 2018), you can earn about 1.85% interest in one. This is a good option if you want to be able to access your money at any time and you are more interested in preserving it than growing it. These accounts are FDIC insured up to $250,000, so you don’t have to worry about losing money except to inflation.

 

Money Market Account

A money market account is a lot like a savings account in terms of what it will do for you. While traditionally they offered higher rates, at the moment the rates are about the same as a high-yield savings account. Many money market accounts also provide you with checks and a debit card in case you want to take money out. These accounts are also FDIC insured up to $250,000, so you don’t have to worry about losing money except to inflation.

 

Certificate Of Deposit (CD)

With a CD, you deposit your money in a bank for a specified period of time during which you cannot withdraw it. You don’t have immediate access to your money as with a savings or money market account, but in exchange, you earn a higher interest rate. Right now you can earn up to 3% with a 5-year CD and around 2.5% with a 1-year CD. CDs are also FDIC insured up to $250,000, so there is no risk to the principal.

 

Treasury Bonds

Because they are backed by the US government, treasury bonds, bills, and notes are considered the safest investment available. Whether it’s called a bond, bill, or note is determined by its timeframe- they are all basically bonds. After you purchase them, they pay regular interest until you sell them or they mature, at which point your principal is returned to you. Right now, series I bonds, those that pay out after 30 years, pay about 2.5% interest. Don’t let the 30-year term fool you, you can sell them any time after you’ve had them for 45 days. The risk with bonds is that what people will pay you for them decreases as interest rates increase.

 

Short-Term Bonds

Another option is to invest your savings in short-term bonds. With these, you have a greater risk of losing your money because the companies that issue the bonds could fail or interest rates could rise, lowering the price you can get for the bond when sold. With low but rising rates, short-term bond funds are currently returning under 2%.

 

Stocks

If you don’t have the income to reach your goal and you need your money to work for you, then stocks are your answer. With stocks, you can earn very high interest rates, but you also risk losing it all. With a short time frame, putting all your money into stocks is not usually recommended. However, putting a portion, such as 40% or less, into stocks could help you earn interest while protecting the rest from a drop in the market. When investing in the stock market, you should try to do so in a way that will minimize your taxes.

 

Which Is Best Right Now?

There isn’t one right answer to where you should put your money while you save up for 5 years. However, there are some things about the current economic environment that you should keep in mind while making your decision.

 

First, interest rates are rising and the Fed shows no signs of lowering them again soon. This is good for savings accounts but not as good for bonds. The longer-term a bond is, the more it is negatively affected by rising rates.

 

Second, we are at the tail end of a bull market. That means that the stock market has been going up for a very long time and is due to go down sometime soon. There is no way to tell when things will turn, but I think that most people would agree that sometime in the next five years the stock market will start going down again. This means that there is a good chance stock prices will drop and may not have time to come back up again before your 5-year timeline is met.

 

As with everything in life, there are trade-offs. It may take longer to save up enough in a savings account, but the peace of mind knowing your money is safe might be worth it. Or, you could try to take advantage of the rest of the bull market to grow your money and meet your goal sooner. Whatever you choose to do, I encourage you to stay the course and keep saving; in several years you will be so happy that you did!