How to Invest Your Savings for Short-Term or Long-Term Goals

When it comes to saving and investing, time matters.

Money you need soon generally shouldn’t be in the stock market. Money you’re investing long term — such as for retirement — probably shouldn’t be in a plain old savings account. Why? Because despite a string of rate hikes from the Federal Reserve in 2022, the average rate of return for savings accounts is still quite low.

So before you decide on a short- or long-term investment, think about what you’re investing for and how liquid — or accessible — you need your cash to be. A timeline can help. Are you looking for a safe way to invest your money for one year or less? You should likely stick to high-yield bank offerings, such as savings accounts or certificates of deposit. Are you banking money for a dream trip to Tahiti for your 10-year wedding anniversary? You probably have enough time to take more risk by investing at least a portion of that savings in the stock market.

Here's how to invest money for short-, mid- and long-term financial goals, followed by an explanation of each strategy.

Online savings or money market account

• Current potential annual return: 2% to 2.5%.

• Pros: Liquidity, FDIC insurance.

• Cons: Relatively low interest rate.

If you’re willing to stash your money in an online savings account, you can earn upwards of 2% right now. To be clear, this is more saving than it is investing. But you shouldn’t be after a big return; liquidity is the name of the game here, and your money will be accessible and FDIC insured against loss.

Banking online doesn't mean you have to give up the conveniences of your neighborhood bank, though you can’t walk in a door to a line of tellers who know your name. But you can still do most if not all of the important banking duties: Deposit checks by scanning them with your phone, move money back and forth between accounts, and speak with a customer service rep by phone or live chat.

A money market account functions like a savings account, but generally has higher interest rates, higher deposit requirements, and comes with checks and a debit card.

Federal regulations restrict the number of transfers or withdrawals you can make in both accounts per month.

A bank CD

• Current potential annual return: Upwards of 3%, depending on the term.

• Pros: Higher interest rate than savings account, FDIC insurance.

• Cons: Not liquid, may have minimum deposit requirement.

If you know you won’t need some money for a set period of time and you don’t want to take any risk, a CD might be a good choice. You can find CDs with terms ranging from three months to six years. In general, the longer the term, the higher the interest rate. (You expect more return in exchange for your money being less accessible.)

» Take a spin around: View the best CD rates

CDs aren't ideal during a rising interest rate environment, because they effectively lock your money away at a fixed rate, with a penalty of between three and six months’ interest if you withdraw early. Being stuck in a low-rate vehicle while interest rates are climbing is kind of like eating a salad during a pizza party: sad.

If you go this route, and you’re concerned that interest rates will go up, you can consider a few other options:

• A laddered CD strategy combines several CDs with varied terms. If you have $10,000 to deposit, you might put one-third in a one-year CD, one-third in a two-year CD and one-third in a three-year CD. That way, if interest rates are higher after a year, you can pull funds out of that one-year CD and move it to something with a better rate, capturing a higher return for at least a portion of your savings.

• A bump-up CD allows you to request an interest rate increase if rates go up during the CD term. You can generally request this increase only once and there may be downsides. For example, these CDs may have a lower-than-average initial interest rate and higher minimum deposit requirements.

• A step-up CD is like an automated bump-up CD. The rate is automatically increased at set intervals during the CD term; you don’t have to do anything. But the initial interest rate is likely to be low.

Short-term bond funds

• Current potential annual return: Around 4%.

• Pros: Liquid.

• Cons: Some risk; funds charge expense ratios.

Bonds are loans you make to a company or government, and the return is the interest you collect on that loan. As with any loan, they’re not risk-free. For one thing, the borrower could default, although that’s less likely with an investment-grade corporate or municipal bond, and downright unlikely with a U.S. government bond. (Investment-grade is a quality rating for municipal and corporate bonds that indicates a low risk of default; U.S. government bonds do not have that type of rating system but are considered very safe.)

» Read more: How to buy bonds

Perhaps the bigger risk is that when interest rates rise, bond values typically go down, because the bond’s rate may be below the new market rate, and investors can get a better return elsewhere. That’s why short-term bonds are listed here: Short-term bonds take less of a hit when interest rates go up. You can sell a bond fund at any time, but if you are selling to get out as interest rates are rising, you could face a higher loss with long-term bonds than short-term.

Through an online brokerage account, you can buy a low-cost index fund or exchange-traded fund that holds corporate bonds, municipal bonds, U.S. government bonds or a mix of all of the above. This will diversify your investment, as the fund will hold a large number — often thousands — of bonds. These funds can have minimums of $1,000 or more.

Most stock brokers offer a fund screener that will allow you to sort funds by performance, expense ratio and more. Because you’re not investing in a retirement account, you might consider a municipal bond fund; municipal bonds are federally tax exempt, making them a good choice in a taxable account.

» Get a closer look: Bonds vs. CDs

Peer-to-peer loans

• Current potential annual return: 3% to 7%.

• Pros: Interest rate, low or no minimum investment requirement.

• Cons: Highest risk, low liquidity.

Peer-to-peer loans are just what they sound like: You loan money to other people in exchange for interest. This isn’t done in dark alleys or via an IOU to a friend — or at least, it shouldn’t be. There are online platforms specifically for this purpose: Prosper is one of the biggest, and it connects investors to borrowers all over the country.

These borrowers are typically assigned a grade based on their creditworthiness, allowing you a little control over how much risk you take. You can choose to lend money only to borrowers in the highest credit tiers, though even those loans are not risk-free. (To be clear, this is the highest risk option of these intermediate-term investments.) Just like in a standard lending environment, the interest rates charged to low-credit borrowers are higher, meaning the more risk you take, the higher your potential return.

To minimize risk further, you should diversify your investment in these loans as you would diversify any other investment. Rather than plopping your money into one or two loans, spread it around in small chunks, lending in increments of $25 or so. (When you do this, you band together with other investors to make up the total of the loan.)

One other important note: You’re locking up your money with these, or at least a large portion of it. When one of your borrowers makes a payment, it is distributed among the loan’s investors and you can either withdraw that money or reinvest it, but you generally can’t pull out your full investment before the loan term ends. You should consider P2P loans mostly illiquid for the length of the loan.

First, a word here about account choice: The vast majority of long-term goals are retirement-related, which means you should be investing in a tax-advantaged account. That’s a 401(k), if your employer offers one with matching dollars, or an IRA or Roth IRA if your employer doesn’t. Here’s how to decide whether you should contribute to a 401(k) or IRA, and then how to decide between a Roth and traditional IRA.

» Read more: What is a long-term investment?

If your long-term goal isn’t retirement, or you’ve maxed out the contribution limits of these accounts, you can open a taxable brokerage account (consult our picks for the best brokers). One major difference, aside from the tax treatment: You can put as much in a brokerage account as you want, and pull money out at any time. IRAs and 401(k)s are designed for retirement and often impose penalties and taxes on distributions before age 59½.

Equity index funds

• Potential annual return: 7% to 10% for a long-term historical average.

• Pros: Long-term growth, diversification.

• Cons: Higher risk, minimum investment requirements, fund fees.

In general, you only want to play the stock market when you’re investing for a long-term goal. And even if your deadline for using the money is flexible, you need to come to terms with the fact that you're taking on more risk and might lose money.

For long-range goals, it makes sense to put at least a portion of your savings toward equities (stocks), because you have the kind of time horizon that can weather market ups and downs. And you can always dial back the level of risk you’re taking, for instance moving more toward bond funds as your goal date approaches.

» Read our guide: How to invest in stocks

One of the best ways to build a diversified portfolio is to purchase low-cost equity index funds. These funds track an index — say, the S&P 500 — and by track, we mean they aim to keep pace with it; nothing more, nothing less. This is a departure from an actively managed mutual fund, which employs a professional who tries to beat the market (and, in reality, rarely does). As you can imagine, the latter has higher fees to account for that professional’s salary, and often doesn’t make up the difference in performance. That’s why index funds tend to rule the roost.

» Read more: Understanding investment fees

Look for a no-transaction fee fund with a low expense ratio that invests in a broad market index — again, the S&P 500 is a good example. Another good example is a total stock market index fund, which gives good exposure to a broad range of U.S. stocks. As you add more money to your portfolio, you can diversify further by buying index funds that cover international equities and emerging markets equities. You may also want to temper some of that risk with a bond fund (more about this down the page).

You can purchase index funds through a brokerage account or retirement account. They tend to have minimums of $1,000 or more, though there are exceptions.

Equity exchange-traded funds

• Potential annual return: 7% to 10% for a long-term historical average.

• Pros: Long-term growth, diversification, low minimums, tax efficiency.

• Cons: Higher risk, fund fees.

ETFs are a form of index fund that trades like a stock, which means you buy in for a share price rather than a fund minimum. That makes these funds easier to get into if you’re starting with a small investment, and easier to diversify, because you may be able to buy several funds with a relatively small amount of money.

Other than that, they have all the perks of index funds: Passive management that tracks an index, low expense ratios (in many cases — never assume a fund is inexpensive just because it’s an index fund or ETF), and the ability to buy a basket of investments in a single fund.

Robo-advisors

• Current potential return: Varies based on investment mix.

• Pros: Hands-off diversification and rebalancing, portfolio management, tax efficiency.

• Cons: Management fees, possible account minimum.

Robo-advisors aren’t an investment themselves, but a way for you to invest. These services manage your portfolio: You provide details about your time horizon, goals and risk tolerance, and you get a portfolio to match, often built with ETFs, in either an IRA or taxable brokerage account.

The portfolio will be rebalanced as needed, and — if your money is in a taxable account — robo-advisors perform tax-loss harvesting to lower your tax bill. You’ll pay for the trouble, but the fees are reasonable compared to a human advisor: generally 0.25% to 0.50% of assets under management, plus the expense ratios of the funds used. All in, you could pay under 0.50% for a managed, relatively hands-off portfolio tied to your time horizon and risk tolerance.

That means this could be a suitable choice for intermediate-term investments, as well — though most of robo-advisor portfolios have some level of stock allocation, so you’d have to be comfortable with a bit of risk.