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Choosing the right home for your money can help you reach your financial goals faster. Learn about some of the best places to save for three common goals.
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Paying the bills is a feat unto itself every month for a lot of people, but unfortunately, that’s not enough to provide us with the lifestyle we want. There are larger financial goals you have to save up for over time if you hope to achieve them.
In these cases, where you save your money can affect how quickly you reach your goal as much as the amount you set aside for it each month. Here are some of the best accounts you can use to save for three of the most common life goals.
1. Major purchases
Major purchases can include things like buying a new car, making a down payment on a home, or saving up for a wedding or vacation. Some of the best accounts to save for these types of purchases are the following:
High-yield savings account
A high-yield savings account keeps your money liquid and enables you to add funds as needed. These accounts are typically offered through online banks, and they rarely charge monthly maintenance fees, so your balance should only grow with time.
But your rate isn’t locked in with a savings account, so there’s no way to predict exactly how much you’ll earn in interest over time. Still, you can expect to make at least some money on your savings with no risk of losing your initial deposit (thanks to FDIC insurance), like there would be if you invested it in the stock market.
Certificate of deposit
A certificate of deposit (CD) is another type of account commonly available at banks and credit unions. It enables you to earn a guaranteed interest rate over the length of the CD term, which could be anywhere from a few months to several years, depending on what you choose. But in exchange, you agree not to touch the money during this time. Early withdrawals result in penalties.
This could be a good fit if you feel confident you won’t need the money during the CD term. CDs are especially popular when interest rates are falling because you can lock in a high rate and potentially earn more than you could with a savings account during the same time.
2. Higher education
College tuition can easily cost tens of thousands of dollars for a single year, and some people spend six figures or more to obtain their degree, depending on where they attend school. It’s possible to use savings accounts, CDs, and even taxable brokerage accounts to save for higher education costs. But one of your best options is a 529 plan.
These are special savings accounts intended for higher education costs. They enable you to invest your money so it grows more quickly over time, and they offer special tax advantages. Parents and other family members may contribute up to $17,000 per year to one of these accounts without incurring a gift tax.
Students can use this money for K-12 expenses as well as traditional university or trade school expenses. They may also be able to use it to cover the costs of some apprenticeship programs. And thanks to a new law change going into effect in 2024, you’ll soon be able to roll over unused 529 plan funds up to a lifetime maximum of $35,000 into a Roth IRA in the beneficiary’s name.
3. Retirement
Retirement accounts are your best bet when saving for your life after the workforce. These are tax-advantaged accounts that enable you to invest your money so it can grow more quickly. Here are two of the most common options you’ll encounter.
401(k)s
Employers can offer 401(k)s to their employees to enable them to save for retirement. These accounts have high contribution limits. Adults under 50 may contribute up to $22,500 in 2023 while those 50 and older may save up to $30,000 this year. You could also be eligible for an employer match if your company offers one.
Most of the time, 401(k) funds are tax-deferred, which means you get a tax break for contributing to one, but then you owe taxes on your withdrawals later. However, Roth 401(k)s, which require you to pay taxes on your contributions upfront in exchange for tax-free withdrawals, are becoming more popular.
401(k)s typically restrict you to a handful of investment options your employer selects, and this isn’t always ideal for everyone. If all the available funds charge high fees, your 401(k) may not be the best home for your savings.
IRAs
IRAs are retirement accounts you can open with just about any broker. You may save in one as long as you’ve earned at least enough income to cover your total contributions for the year. If you’re married, you can contribute to one even if you didn’t work at all, provided your spouse earned enough to cover all contributions to your account.
IRA contribution limits are lower than 401(k) limits. You can only save up to $6,500 here in 2023 or $7,500 if you’re 50 or older. But these accounts give you a lot more flexibility to invest your money how you want. You can also choose if you want to pay taxes on your money upfront, as is the case with a Roth IRA, or when you take your money out, which is the case with traditional IRAs.
These are just a few examples of some of the accounts you can use to save for your major financial goals. It’s best to weigh all your options before you decide where you want to place your funds. And the right choice for you might be to use a combination of the accounts discussed here. Choose what you think is best for you right now, and don’t be afraid to switch things up down the road as needed.
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