One of the top questions I get from participants in my free coaching program for philanthropists is the following:
How should I save for a big expense I’ll need to cover in 3-5 years? Should I invest or keep the money in cash?
These big expenses are things like a home purchase, a wedding, starting a business, saving for a sabbatical, you name it. If it’s a near-term expense, I’d say keep the money in cash. A long-term expense, I’d say invest it and let it grow. However, 3 to 5 years puts you somewhere in the vague mid-term. Do you keep your money in cash and risk losing its value due to inflation? Or do you risk investing it and losing some of that value?
If you're saving up for a big mid-term expense, your priority should be protecting the principal while earning a reasonable return. Here’s a general breakdown of your options:
High-Yield Savings Account (HYSA)
Pros:
Low risk: The principal is protected, and your money is FDIC insured up to $250,000
Liquidity: You can easily access the money when you need it
Consistent returns: While not super high, you’ll get a reliable return, often around 4-5% in today’s environment
Cons:
Lower returns: Even with a high yield, the interest earned may not keep up with inflation or potential returns from investing
Certificates of Deposit (CDs)
Pros:
Low risk: Like HYSAs, CDs are also FDIC-insured
Guaranteed return: You lock in an interest rate, which could be higher than a savings account (but definitely not always), depending on the term of the CD
Cons:
Less liquidity: Money is tied up for the duration of the CD term. If you need the money early, you could face penalties.
Fixed return: Returns are fixed, so you won’t benefit if interest rates rise
Invest in a Brokerage Account
Pros:
Potential for higher returns: Over five years, investments with a balanced portfolio of stock and bond funds could generate higher returns than a savings account or CD
Cons:
Risk: There's significant risk, especially over a relatively short period like five years. A market downturn could reduce the value of your investments at the exact time you need the money.
Uncertain returns: While stocks and bonds tend to perform well over the long run, there's no guarantee of what returns will look like in just five years
Important Note! You should hold your investments for at least a year to qualify for long-term capital gains tax rates, which are much lower than the short-term rates taxed as ordinary income. By the way, we teach all this stuff and more in our Learn to Invest course!
Treasuries
Pros:
Lower risk: Individual Treasury securities (like 5-year Treasury notes) offer stability, especially compared to stocks
Predictable income: They pay interest, which could give you steady income over the five years
Cons:
Interest rate risk: Individual bond values can decrease if interest rates rise (although the opposite is happening in today’s environment)
Lower returns: While safer than stocks, bonds generally offer lower returns, similar to savings accounts or CDs
Here’s my two cents:
Choose the HYSA if protecting your principal is the top priority and you want easy access to the funds when the expense arises. It’s the safest bet.
Choose the CD if you’re absolutely positive you won’t need the money earlier than the defined term of the CD, and you want a slightly higher return than an HYSA.
Invest in a balanced portfolio if you’re willing to take on more risk and can handle market fluctuations, although with a 5-year time frame this can be tricky and you definitely run the risk of timing the market poorly.
Strictly invest in Treasuries if you're looking for an investment option with lower risk than stocks but potentially higher returns than a savings account.
Given the mid-term time frame, I’m inclined to say that protecting the principal should be a main priority, which makes me personally lean toward the safer options. But if you have some flexibility and a slightly bigger appetite for risk, a blended approach like placing part of the funds in an HYSA and investing the other part in a brokerage account could certainly be an option.
Disclaimer:
The information contained in the Yield & Spread website, course materials and all other related content is provided for informational and educational purposes only. It is not intended to substitute for obtaining accounting, tax, or financial advice, and may not be suitable for every individual. Yield & Spread is not a registered investment, legal or tax advisor or a broker/dealer.