Where do you put short-term savings?

Roulette wheel

I was asked this question recently:

I have about $10,000 that I don’t need to touch for a while, and I was thinking of investing it so I could make the most of it. Where do you recommend I put it?

This is a great question, because it has a lot of nuance, so it’s not just a simple “No” kind of answer (like the questions: “Should I buy loaded mutual funds?” or “Should I hold on to my mortgage so I can get the tax deduction?“)

The answer concerns what other assets you have and your timeline, so even if you don’t have $10,000, this or something similar will probably come up for you.

Investment or insurance?

The question comes from a desire to “maximize”. And this can be a good thing, because otherwise, we’d put all of of our money under our mattress or buried in the backyard, and no one will ever get wealthy that way.

But let us not forget that money has more than one use:

  • As insurance (to lose less)
  • As an investment (to make more)

So before you decide what to do with any money, you want to ask yourself, is it an investment or is it insurance?

How can money be insurance? Note that I’m not talking about life insurance or any product; I’m talking about being “self-insured”. And this means having money for when you need it.

So your emergency fund is insurance. So are any buckets you have set up. So is a home fund, which you will need if you own a home.

Note that I put the insurance first in the list above. I believe you need to find your footing first.

Putting all of your chips on one number is exciting in movies, but not every life moment is like Run Lola Run. While you can make these big plays, you need to be prepared for what happens if your number doesn’t come up.

So if you don’t have your insurance bases covered, your “extra” money isn’t really extra.

How long until you need it?

But let’s say that your insurance is taken care of. What then?

Next, we need to talk about time scale. Namely: how long will it be before you need some or all of that money?

I ask this because we need to play the risk versus reward game.

Some investments are guaranteed not to lose money. But the price of this is that you’re not likely to gain much money. And the reverse is true: investments that can make a lot of money can also lose a lot of money. There is no upside without downside, despite what Tony Robbins says.

It can be tempting to want to put all extra money in mutual funds or other stock market investments because “they go up over time”. But how much time do you have? In 2008, the S&P 500 returned -38%. Sucks if that was the year you decided to put money away.

So I say that if you need to use the money in five or fewer years, do not bother with mutual funds. Instead, use a simple/boring savings account, such as one through Ally Bank or Capital One 360. True, you’ll only make 1%, but you won’t lose anything either.

Over five years, the situation becomes mixed, as there’s a greater likelihood that you’ll make some money in your investment. By 10 years, by historical averages, you are almost guaranteed to have a positive return. So here, I’d say that putting money into low cost index funds would be a (relatively) safe bet.

S&P 500 rolling returns

You’ll still need to pay capital gains tax on your returns, which at the time of writing is 15% for all but the highest earners. But then again, you’d need to pay tax on your savings account interest too (not that you’d be making much anyway).


So here’s what I’d do with that $10,000 first:

  • Pay off debt
  • Fill up emergency fund

From there, it’s dependent on the time scale:

  • Less than 5 years: Savings / money market account
  • 5-10 years: Either savings or index funds
  • Greater than 10 years: Index funds

Remember: don’t try to be sophisticated. Cover your bases first. Don’t let you desire for a big return cloud your better judgement.

(And don’t forget to read my Disclosure Policy.)

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