Where To Put Your Cash When You’re Saving for a Purchase in Less Than 5 Years

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Let’s say you’re making a major purchase in the future. Perhaps you’re buying a house, a car, paying for college or taking the vacation of a lifetime.

If you don’t plan on buying within the next five years, money expert Clark Howard will give you the rubber stamp to invest your money. The longer you wait, the more likely it is that you’ll see a positive return from the overall stock market.

But what if your big purchase is approaching faster? What do you do then?

The U.S. government cites the Consumer Price Index (CPI) (from the Bureau of Labor Statistics) for inflation data. As of January 2022, that index rose 7.5% over the previous 12 months — the fastest since February 1982.

At the same time, the average savings account at a United States bank is earning 0.06% interest.

Let’s say that you’ve picked one of the best high-interest savings accounts from our list and you’re earning 0.5% interest. For every $100 that you’ve got languishing in your savings account, your purchasing power is decreasing by about $7 per year right now, assuming the inflation rate isn’t even higher for the item you intend to purchase.

The temptation to do something else — or anything else — can be strong. But is there a realistic option for you in Clark’s mind?

Here are the Clark-approved places to put your money depending on your timeline.


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Less Than One Year: Purchasing Soon

Making your splash purchase in less than 365 days? Stick to high-yield savings accounts, Clark says.

Yes, inflation is eating away at the value of your dollars daily. Yes, you’re earning a pittance as you help provide banks with the liquidity to finance their loans. But you don’t want to lose the money you’ve earmarked for an important purchase this close to the time you’re planning on making your transaction.

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You won’t be earning much (about $0.50 for every $100 over the course of 12 months, minus income tax). But that’s less risky and better than keeping the money in cash.

It’s possible to explore shorter-term Certificates of Deposit (CDs). But if the interest rate increases, you may be locked into a lower rate than you’d get from your savings account.

Short-term CDs (less than one year) often offer an incredibly small advantage in interest rate. And even if you have six months or more, it can be nerve-wracking to lock up those funds unless you know your buy date with absolute certainty.


One to Three Years: Purchasing in the Intermediate Term

High-yield savings accounts are still an option, Clark says. Especially at the lower end of this range.

But you can add CDs and Series I bonds to the list of Clark-approved options if your timeline is one to three years.

With a CD, you’re giving up liquidity for a specified time (barring a financial penalty) in exchange for an interest rate that can outpace the savings account APY at that institution.

A Series I bond can be an attractive option if you expect inflation to linger for a good while. Right now, the fixed rate for an I bond is 3.56% every six months, or 7.12% annually. That number will get re-adjusted every six months.

At a minimum, with Series I bonds, you’re going to avoid a big-time, inflation-induced loss of purchasing power on this money. That can be a big relief, especially when you’re hounded with inflation headlines every day as interest rates remain historically low.

Keep in mind that you can’t cash your Series I bond until the one-year mark. And if you cash it out in less than five years, you’ll have to pay a penalty equal to three months of interest.


Three to Five Years: On the Cusp of Investing

If you’re this far away from your big purchase, you may be the most tempted to take risks and be aggressive. And you’re not totally wrong.

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This is a long time to leave large sums of money in a savings account earning less than 1% interest. And who knows how long big-time inflation will linger?

Good news: You can add ultra-short-term bond funds to your arsenal of potential choices.

It’s important to stick to ultra-short-term bonds, Clark says, because the time frame lowers your risk as interest rates rise. You could still lose money, though — especially in the short term.

For example, with heavy discussion of potential Fed rate hikes, the Vanguard ultra-short-term bond index fund was down nearly 0.6% through the first 53 days of 2022.

“The odds that you would lose money over a three, four, five-year period in an ultra-short bond fund — I mean, you’d have to be the unluckiest soul out there to lose money over that period of time,” Clark says.


Final Thoughts

It’s tempting to invest some or all of your money for a purchase that’s less than five years in the future. But the shorter your available time, the higher your risk — even if you’re diversifying your investment into a total stock market ETF.

Luckily, if your timeline is longer than one year, you can do a few things to out-earn the poor rates you’re currently getting at even the best savings accounts.

Incidentally, it’s not a great time to buy a car or a house as of early 2022 due to inflation. So these strategies could be super helpful to you if you’re waiting on the markets to self-correct.

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