“This year has been a great example of why money for short-term needs should be held in cash in a high-yield account, not invested in the stock market,” says Tony Molina, a CPA and Product Evangelist at Wealthfront. “Take your emergency fund, for example. That’s money you’re keeping for a rainy day — say an unexpected medical bill, house or car repair, or job loss — so you don’t want that money to be subject to market volatility. No one wants to receive an unexpected medical bill only to find that your emergency fund is now less than you expected because the market had a bad day.”
At the same time, Molina cautions against over-saving. It’s important to ensure that a sizable chunk of your net worth is able to outpace inflation and typically, only keeping money in a savings account won’t allow you to do that.
“Beware that there is such a thing as saving too much in cash,” he says. “If you don’t invest enough of your money, you won’t be able to keep up with inflation. But you should only invest money that you don’t expect to need in the next three to five years.”
This way, you have a longer time horizon to rebound from any short-term market dips.
Of course, before you begin to invest, you’ll want to make sure you have a fully funded emergency savings account. Having an emergency fund allows you to avoid selling your investments to pay for an unexpected expense, like a surprise car repair or a leaky roof. Experts typically recommend having three to six months’ worth of savings stashed away in a high-yield savings account.
Select ranked LendingClub High-Yield Savings as the best overall account, as it offers a high APY and no monthly fees. Of course, there are a variety of options. The SoFi Checking and Savings offers new account openers a welcome bonus of up to $300, depending on how much money they deposit. Wealthfront also offers a a Cash Account with “savings buckets” that let you organize your savings goals while still earning interest on your balance.
Read the full report here