In Step 5 of the ‘Rat Race Off Ramp’, I wrote about how to ‘Ramp Up Your Savings’. Today, I’ll go over where those savings should go. For the most part, where you save and invest comes down to when you will need the money you are saving. And with that, let’s dive in.
Where Should You Save?
This may very well be the most difficult and overwhelming question for anyone saving and investing, whether you are starting out or have been saving for years. Why? Options. There are seemingly unlimited options for where to put your money, which makes it very easy to become overwhelmed. A few of these options include: stocks, bonds, CDs, ETFs, mutual funds, and high-yield savings accounts. This can lead to decision paralysis or choice paralysis, leaving you unable to decide where you should save or invest, resulting in financial paralysis. This will lead your money to being left in a near zero interest rate savings account earning you nothing, so let’s find better ways to protect and grow your savings.
Emergency Fund
I’ll start here with where your emergency fund shouldn’t be: the stock market. Your emergency fund should be easily accessible and have no risk of losing money. It should be in a high-yield savings account or certificates of deposit (CDs) at your bank or credit union. If you use CDs, you can keep some of your emergency fund in a high-yield savings account and set up a CD ladder with the rest of your emergency fund.
Goal Oriented Savings
Way back in “Step 1: Set YOUR Goals,” I discussed setting short-term, medium-term, and long-term goals. Each type of goal had an associated time period, which also impacts the best places for your savings for each goal to go.
Money saved for your short-term goals (less than 2 years) should be in the same type of accounts as emergency funds: high-yield savings accounts and CDs. In order to make sure you can meet your short-term goals, you want to remove the risk of the stock market and the risk of losing money.
Money saved for your medium-term goals (2-5 years) can be mixed between conservative vehicles (high-yield savings account and CDs) and more risky vehicles like bonds and stocks. For 90% (or more) of investors, your investments in stocks and bonds should be in low-cost mutual funds or exchange traded funds (ETFs).
Money saved for your long-term goals (greater than 5 years), should be invested in stocks and bonds. Just like above, just about everyone should be investing in low-cost mutual funds or ETFs.
Soon, I’ll dig into different mutual funds and ETFs more, but if you’re looking to get a start, take a look at some of the lowest cost ETFs and mutual funds out there for stock index funds:
| Stock Mutual Funds | Schwab | Vanguard | Fidelity |
| Total Stock Market Fund | SWTSX | VTSAX | FSKAX |
| S&P 500 Fund | SWPPX | VFIAX | FXAIX |
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