You’re making a major purchase in the future. Perhaps you’re saving to buy a house or a car, pay for college or take 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 June 2022, that index rose 9.1% over the previous 12 months — the fastest since February 1982. Since then, persistent interest rate hikes have reduced annual inflation to 3.0%.
The silver lining of all of this has been increased interest rates. The average savings account at a United States bank went from earning 0.06% in March 2022 to earning 0.53% interest now. The best high-interest savings accounts are paying much more than that.
Let’s say that you’ve picked one of the options from our best savings accounts list and you’re earning 4.5% interest. For every $1,000 that you’ve got in your savings account, your purchasing power is increasing by about $15 per year right now accounting for 3% inflation.
Stashing all your savings in a high-yield savings account — and not anywhere else — has become a fine idea. But are there other realistic options for you in Clark’s mind?
Here are the Clark-approved places to put your money depending on your timeline.
Table of Contents
- Less Than One Year: Purchasing Soon
- One to Three Years: Purchasing in the Intermediate Term
- Three to Five Years: On the Cusp of Investing
- Why Clark Wants You To Consider Parking Your Cash With Fidelity, Schwab or Vanguard
Less Than One Year: Purchasing Soon
Making your splash purchase in less than 365 days? Stick to high-yield savings accounts, Clark says.
As long as you’re making a good choice in terms of the bank you’re using, inflation no longer is eating away at the value of your dollars. You’re earning a good rate.
You don’t need to chase higher yields and risk losing the money you’ve earmarked for an important purchase this close to the time you’re planning on making your transaction.
You’ll earn between $4 and $5 for every $100 over the course of 12 months, minus income tax.
It’s possible to explore shorter-term Certificates of Deposit (CDs). But if the interest rate continues to increase, you may be locked into a lower rate than you’d get from your savings account. You also don’t want to have to bail out of a CD early and forfeit some of the interest you’ve earned.
Short-term CDs (less than one year) often offer incredibly small interest rate advantages. 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.
If you really want to chase yield, U.S. Treasuries are an option as well. As of this writing, Treasury rates from one month to one year are all paying more than 5.3%.
One to Three Years: Purchasing in the Intermediate Term
High-yield savings accounts are still an option, Clark says.
But you can add CDs 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.
Series I bonds, previously a great option for cash you won’t need for one to three years, are no longer looking as attractive. You may still consider this option if you expect inflation to reverse course and rise again. Right now, the fixed rate for an I bond is 4.3%. That number will get re-adjusted every six months.
With Series I bonds, you’ll avoid a big-time, inflation-induced loss of purchasing power on this money. It sure seems like inflation is headed back toward the stated 2% annual target. But the Fed also seems close to ending its rate hikes.
Knowing you can protect your money against inflation, plus grow it by 0.90% on top of inflation, can help you sleep well at night. Especially if the threat of inflation flaring up again starts to increase.
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.
This is a long time to leave large sums of money in a savings account — even one earning close to 5% interest — when the S&P 500 is up 19.5% through nearly seven months of 2023.
Good news: You can also 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 a flurry of Fed rate hikes, the Vanguard ultra-short-term bond index fund fell more than 0.5% in a highly unusual 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.
Why Clark Wants You To Consider Parking Your Cash With Fidelity, Schwab or Vanguard
Saving to buy a home, buy a car or pay for college within the next five years?
The great news is that there are many relatively good options to make money on your idle cash. Especially compared to when I first wrote this article in March 2022.
On top of that, the timeline buckets — less than one year, one to three years and three to five years — matter very little right now.
What’s most important is where you put your money. That means comparison shopping for the right high-yield savings account. Or it means turning to Clark’s favorite investment companies.
“One of my favorites for any of the three buckets is putting money with Vanguard, Schwab or Fidelity,” Clark says. “I have such a bias toward doing short-term savings through the three big discount houses. It just has worked out so well for people.
“You look at where assets are going in the country. They’re going so heavily away from the banks. It’s kind of shocking. I think the bank share of assets in the country is now below 10%.”
Long-Term CDs Are Still Attractive But You Need To Hurry
If you agree with Clark’s advice, what should you do within those discount brokers?
Take advantage of good rates on CDs right now, Clark suggests. Right now, you can still find five-year CDs paying 4.5% or even a tad higher. Those are FDIC insured even if you’re going through Fidelity, Schwab or Vanguard. You can consider a CD ladder as well.
“The advantage of being able to buy CDs is you’re locking in the rates at a time that the rates seem to have peaked,” Clark says. “And they’re headed down.
“Let’s say you know you’re not going to [need your cash] for six months. You can still buy a six-month CD and know you’ll get that rate for the six months. But really, the real action is one year or more on the CDs.”
Locking in a great rate on a three, four or five-year CD right now, especially if the Fed cuts rates at some point in the next 18 months, can ensure that you have a safe, secure way to grow your cash — especially if your major purchase is years away.
Just make sure that you feel confident in your timeline if you’re going to get into CDs.
“If a house is what you’re looking at, you have to air on the short side rather than the long side,” Clark says. “Because if you buy a five-year CD at let’s say 4.65%, and then you have to bail, you’re going to forfeit the last 90 days interest.
“Which if you’ve been in it several years isn’t going to matter a whole lot. But if you have to bail quicker than you think, then it really impacts the interest you’re going to earn.”
Other Clark-Approved Ways To Get Yield on Your Cash
U.S. Treasuries can be a pain to purchase directly. But, Clark says, you can do it easily with Fidelity, Schwab or Vanguard.
Clark also considers U.S. Treasuries to be safer even than accounts with FDIC insurance.
“Treasuries are having to pay more [right now] because the budget deficits got so big during COVID. And so the demand in the Treasury for cash is ginormous,” Clark says.
“A lot of the banks don’t want more cash right now. So they don’t have as much incentive to pay as much as the Treasury does right now.”
Money market funds and short-term bonds are also places Clark says are OK to consider putting your cash.
It’s tempting to invest some or all of your money when saving for a purchase that’s less than five years in the future. But the less time you have, the higher your risk — even if you’re diversifying your investment into a total stock market ETF.
Luckily, the best savings accounts are paying interest rates worth many times what they were at the beginning of 2022. However, there may be a few things you can do to out-earn the improved interest rates you’re currently getting from the best savings accounts.
Incidentally, it’s not a great time to buy a house. The vehicle market finally is improving, although slowly and unevenly. You may be rewarded for patience on that front as well. So these strategies could be super helpful to you if you’re waiting on the markets to self-correct.