Have you ever thought, “Is my money in the right place?”
Don’t worry, you are not alone. Many people are not sure where to put their money.
Some items to consider include:
- What the money is for?
- How soon will you need it?
- How comfortable are you with fluctuations in the value?
To begin, you need to think about number 1 – your purpose or goals. What is this money for? Retirement? A large purchase such as a car or a house? Or is it a fund for unexpected emergencies?
Answering number 1 helps you determine the answer to number 2 – how soon will you need the money? When you will need to use the money will inform your decision on where to put it for saving – ask yourself whether you will need it in the short term (up to a year), medium term (1 to 10 years), or long term (10 or more).
Short term items include money to pay for immediate needs such as bills or money you need easy access to in case of an unexpected emergency, like a major car repair. When you need easy or immediate access to money, you would keep it in a checking account, savings account, or money market account. These accounts offer easy access but very low interest rates. If you frame it in terms of risks vs reward, these accounts are low risk, low reward.
Saving money for large purchases, such as preparing to buy a car or house, will fall in the medium savings ranges. At this point, you are trying to maximize the amount of interest you can earn without fluctuations in the value of the money. You can still consider a money market account, but you will also want to consider certificate of deposits (CDs) or savings bonds, which offer higher interest rates but less access to your money.
When you think long term, you are talking about investments. This would include stocks, bonds, and mutual funds. Now we need to go back to the concept of risk vs reward. Risk means that you also have the potential for losing money. In return for the risk, you have the potential for a greater reward. Stocks and mutual funds are tied to stock market. Bonds are tied to the risk associated with the investment. Because of the risk associated with investments, it is beneficial to consult with a financial adviser.
For more information, check out the University of Maryland Extension’s Financial Education Programs, available throughout the state.