Could You Be Making More on Your Money?
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Maybe you get a tax refund, earn a bonus at work, win a March Madness pool—or clean out your closet and clean up on online resale sites. Perhaps you’ve just been diligently socking money away from every paycheck. Whatever the reason, there’s a lot of cash sitting in your savings account that’s earning less than a penny per dollar, and suddenly you think: Surely I can do better than this.

Chances are, you can. The question is where to move that money to make it work harder for you.

The first step—before you do anything else—is to make sure you’ve paid off any high-interest debt and padded that emergency fund with at least three months’ worth of expenses.

Why? It’s very unlikely you’ll be able to earn more on your money than you’re paying on your credit card debt—especially when the average interest on a variable card is now nearly 16 percent. (Even if you have a special promotional or balance-transfer deal, that typically has an expiration date when it reverts to a much higher interest rate.)

And the emergency fund? That will help you avoid taking on credit card debt when you get hit with an unexpected but unavoidable expense—whether it’s a broken ankle, a blown-out tire or a burst water pipe. It will also provide a cushion if you lose your job.

When it comes to emergency funds, Mitch Goldberg, president of the investment firm ClientFirst Strategy advocates holding it in a savings account, where the money is secure and easy to assess. “It will be there when you need it for an emergency,” he says, “and believe me, we all have those.”

But that doesn’t mean you need to settle for a .55 percent annual yield (the average as of mid-March). Some online banks, such as Synchrony, CIT Bank and Ally, are currently offering rates of 1 percent or higher.

If your emergency account is fully funded and you’ve paid off any credit card debt, you can really put your money to work. The big question to ask yourself is: How long can I wait ’til I need that money?

If you can wait decades…

Depositing it into a tax-advantaged retirement account will likely offer the most for your money. Period. If you haven’t already maxed out your contributions to an Individual Retirement Account (IRA)—that’s $5,500 in 2016 if you’re under 50 (and you can still make a 2015 contribution through April 18)—you might consider putting some or all of your savings there.

Why? For one, depending on whether you also have access to a retirement plan at work, some or all of your contributions may be tax-deductible. Bonus!

You also have the chance to earn exponential returns because you’ve got time. Typically, you’ll be charged a 10 percent penalty on withdrawals made before age 59½. (That fee could be waived, though, if the withdrawal is used for higher education, buying a first home or for hardships, such as qualifying medical expenses.)

Allowing your investments to grow untouched for a long time can net serious benefits—whether you put your money into an IRA or a regular investment account. Not only do stocks and bonds generally offer higher returns than savings accounts or CDs, but over time, you can benefit from compounding, or returns earned on your returns.

While the stock market can fluctuate on a daily basis, it has trended up over the long term—so if you have time, most experts recommend putting more of your money into stocks than bonds. (One rule of thumb is to subtract your age from 100, and devote that percentage of your portfolio to stocks.)

Investing in diversified, low-cost exchange-traded funds (ETFs) like State Street’s SPDR, which corresponds to the S&P 500 index, is often the best bet because you’ll forgo less to fees than you would for an actively managed fund. And owning shares in a lot of different stocks (or bonds) lowers your overall risk exposure. The SPDR fund is down slightly this year, but it’s been up nearly 9 percent annually in the 23 years since its creation.

To put that in perspective: If you invest $1,000 in ETFs like SPDR, and you see average annual returns of even 8 percent, you could have nearly $7,000 in 25 years without adding another cent.

While you can also invest in individual stocks, these will be more volatile than a broader vehicle, like an ETF or mutual fund, and the downside risks are higher.

If you can wait three to 10 years…

If you have a medium-term goal, like putting a down payment on a home within five years, then you still don’t have to fret too much about liquidity or volatility.

A mix of stocks and bonds probably remains your best bet—though you’ll want to stick with a regular investment account to avoid any early withdrawal penalties. As you get closer to the date you need your money, advisors generally recommend shifting money from stocks into bonds and cash accounts. (Think: high-yield savings.)

You can buy a mix of stock and bond ETFs, as you would buy single stocks. (They have ticker symbols and trade like stocks.) Make sure you have a diversified mix, with small-cap, mid-cap, large-cap, foreign and domestic stocks, and a mix of bonds as well (that can include corporate, municipal and Treasury bonds). And keep an eye on the expense ratio, which is the annual fee that funds charge shareholders to cover expenses. Experts generally recommend looking for expense ratios of .50 percent or less.

If you need your money in a year or two…

If your goal is one or two years away—say, to buy a car or attend a friend’s destination wedding—then access isn’t a huge worry, but you do want to minimize losses.

“If immediate liquidity isn’t as much of a need, you could focus more on CDs to increase your rate of return,” says Tim Maurer, author of “Simple Money” and the director of personal finance at the BAM Alliance.

Currently, the best rates on one-year CDs are a bit more than 1.2 percent from providers such as First Internet Bank and BAC Florida Bank, while top rates for two-year CDs are in the 1.41 to 1.51 percent range, says Ken Tumin, founder of  DepositAccounts.com, which offers comparison tools.

However, CDs are less liquid than savings accounts, and will penalize you for withdrawing money before they mature. The difference in returns between one- and two-year CDs and high-yield savings accounts is small enough that it may make more sense to simply move it into a high-yield savings account if you think you may need the money sooner, after all.

The most important thing, Maurer says, is simply segregating the funds from your regular spending account. “That will help you avoid raiding the pledged cash.”