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How should you use your savings?

By Paula Pant ·
Friday, December 27, 2013
Posted: 3 pm ET

People often wonder how they can save more. But they rarely ask the natural follow-up question: Once I have started saving, where should I put that money?

Taking these steps can lead you to the right answer.

Figure out why you are saving

Every dollar should have a purpose. Perhaps that $100 you put aside from your last paycheck is slated for your "future car and home repairs" fund. Perhaps it's meant for your "vacation and holiday gifts" fund. Or perhaps it's designated for retirement.

Don't just let cash pile up in your checking account. Give every dollar a designation.

To do this, brainstorm a list of all your goals and needs. For example, you need savings tucked away for future/unexpected medical, car and home costs. You also need some cash saved in case of a job loss.

In addition, you have goals, such as paying for your child's college education, or taking a trip to California next summer.

Write down how much you've saved, and divide that between your needs and goals. Then, note how much you plan to save each week or month, and earmark each dollar toward a need or a goal.

Determine your savings timeline

Split your goals/savings based on when you anticipate needing to tap the funds. Categories should include:

  • One year or less
  • One to five years
  • Five to 10 years
  • Ten years or more

If you're not sure when you'll need the money -- for example, if you're creating an emergency fund -- treat the money as if you'll need to tap it within a year.

Consider the level of risk that is prudent

Look at your timeline when determining how much risk to take. Here are some examples. (Remember, these are only examples, not investment advice. Contact a financial adviser for advice.):

  • One year or less. Keep the money in a high-yield savings account or a money market account.
  • One to five years. Keep the money in certificates of deposit. Divide it among six-month, one-year, two-year and five-year CDs.
  • Five to 10 years. Consider buying bonds, bond funds, Treasury inflation-protected securities, or TIPS, or other fixed-income assets. You can stomach a bit more risk. TIPS, in particular, will help you keep pace with inflation.
  • Ten years or more. Consider buying stock funds, such as passive index funds, if you can stomach the volatility. This will help your money grow.

You've worked hard for your savings. Shelter it in the right places.

Paula Pant is a journalist-turned-blogger who helps people shatter limits, ditch the cubicle and live on their own terms. She's traveled to 30 countries, owns six rental property units and hasn't had an employer since 2008. Her blog, Afford Anything, is the gathering point for a tribe that refuses to say "I can't afford it." Follow Paula on Twitter: @AffordAnything.

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