What Type of Account Is Best for Short-Term Savings?

savings account

I’m two years out of college with a steady job and am trying to save for a down payment on a house in the next two years. Now that I'm producing income and am able to save, I'm transferring more money to my savings account (which only has a .01% interest rate). I already have more than six months of expenses as my emergency fund. Should I start investing my money now instead of continuing to put it in a savings account? What can I do to ensure I'm earning enough interest but also able to access the money in a couple of years? — Sharon
Congratulations on having a very good “problem”! Two years out of college with a good job, an emergency fund and a steady cash flow is an enviable position to be in. The question of how to best make your money work for you while saving the funds needed for a down payment in the next several years is a tough one without a good answer. Given the investment options currently available, you are taking the right approach to saving for your first home. There are no high-interest options for short-term, liquid investments with no downside risk. Yes, stocks are liquid and historically have provided a higher return than the 1 percent rate that you have found online, but two years is too short of a time horizon. 

I advise most clients that if their time horizon is less than five years, the funds should not be put into the stock market. Stocks are much more volatile than cash and anything can happen in two years. Just think about what we have seen in recent history. If you had this down payment saved in a U.S. broad stock market index fund in 2007, you would have lost nearly 40 percent of it in the following year — yikes! If you were able to wait it out to get back to your original investment, it would have taken about five years. 

Money market rates are very low because of the dramatic steps the Federal Reserve took during the financial crisis to stimulate the economy. The Federal Reserve has clearly stated they will keep short-term rates low for the foreseeable future until they are convinced the economy is on solid footing. The good news is that when you go to get a mortgage in two years, you should be able to benefit from this low interest rate environment.

One thing for you to consider and evaluate is the use of retirement savings. Do you have a 401(k) at work? If so, are you putting money into to it? How is this invested? Since you are young and have a very long time before you will likely access these funds, I would advise putting this investment into stocks.

Keeping your emergency funds and your house down payment money in a short term, liquid, money market account is the appropriate choice of investment.

Binney Wietlisbach has worked in the financial services industry since 1985 and has been affiliated with The Haverford Trust Company since 1992, acting as its President since 2008. She is a member of the Executive Committee, a voting member of the Investment Selection Committee and a member of the Board of Directors of The Haverford Trust Company. Binney is also the Vice President of Haverford Financial Services. She is the mother of two teenage children, an avid runner and plays on the first golf team for Gulph Mills Golf Club.

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