What to do with money instead of savings account

Having the safety net of savings makes financial sense no matter your current situation. It's important to have an emergency fund if you ever lose your job, and you'll likely need cash to make a down payment on your first home or to achieve other milestones.

But at some point, once you have stockpiled enough cash, you should start reallocating some savings to investing if you really want to maximize the amount of money you can earn, whether it's for building your wealth or planning for long-term goals like retirement.

Since each person and/or family faces different decisions based on their personal goals and needs, Select spoke with some certified financial planners (CFPs) about general guidelines consumers can follow to know whether they're ready to start investing.

The main rule of thumb is making sure you have access to cash when you need it, and that means meeting certain thresholds before taking on the risk of the stock market. One financial planner suggests you go through a "mental checklist" before investing to make sure your finances are stable.

You should be able to answer the following questions with a "solid yes" before you start investing says Gordon Achtermann, a Virginia-based CFP.

Question 1: Do I have an adequate emergency fund?

When deciding between saving or investing your money, first look at what cash you have to fall back on if needed. Experts generally advise building short-term savings and then investing whatever surplus cash you have left over.

For this purpose, high-yield savings accounts are a great option because they come with zero risk — meaning your money will always be there. When you invest, your money can increase or decrease depending on the day-to-day changes in the market, so there is much more risk.

"An FDIC-insured savings account is nearly risk-free for short-term savings and is not subject to market fluctuations," says Sebastian Rollén, senior investing researcher at Betterment.

What classifies as an "adequate" emergency fund varies depending on your job security and income. Achtermann provides the below guidelines for determining how big your fund should be:

• 3 months of expenses: For couples with two incomes and very secure employment
• 6 months of expenses: For couples with two incomes but less secure employment or one partner not working
• 1 year of expenses: For an individual with one income that is less than very secure

But high-yield savings accounts aren't just to used for emergency savings. They're also useful as you're trying to save up for certain financial milestones. "A high-yield savings account can serve as a rainy day fund, but also an 'opportunity fund' for sunny days, says Bryan Kuderna, a New Jersey-based CFP and author of "Millennial Millionaire."

Rated as Select's best overall choice, the Marcus by Goldman Sachs High Yield Online Savings, is a straightforward savings account to use when all you want to do is grow your money with zero conditions attached. It comes with no fees whatsoever and easy mobile access.

Question 2: Am I committed to leaving the money in place for 2 to 5 years or longer?

For longer-term goals that you're not looking to achieve in the next two years, there are other factors to consider when deciding where to allocate your money. Savings accounts, even the best high-yield ones, offer a relatively low return compared to investment accounts — sometimes even lower than the rate of inflation.

"If a savings account has a lower interest rate than inflation, the purchasing power of the cash in the account will decrease over time," Rollen says. This means that as inflation goes up, it can eat into an already low return that you are earning on your money.

At this point, you should invest your money in a low-risk investment portfolio. 

"Investing the cash in a diversified portfolio will usually yield a higher average return than leaving it in a savings account," Rollen says, adding that you should be prepared for some fluctuations in your balance and have an investment horizon greater than a couple of years. 

"Placing the cash in a well-diversified, low-cost investment portfolio could provide a greater likelihood of reaching the investment goal," he says.

A more aggressive approach to saving comes with higher risk, but it's better for long-term goals when you already have the safety net of an emergency fund in place.

"The answer to when to put money in a high yielding savings account versus an ETF or any other investment for that matter is [asking] what kind of risk can you afford to take with the money you are putting in?" says Scott Cole, an Alabama-based CFP.

A common option for beginning investors is putting money into an Exchange-Traded Fund (commonly referred to as an ETF). "ETFs are a collection of securities that typically track an index, the most common of which is the S&P 500," Kuderna says.

ETFs don't require large amounts of capital in order to invest in a range of stocks. They can be a good way to dip your toe into the investing pool and to get exposure to the overall stock market. When you open an ETF, you can decide how aggressive or conservative you'd like to be based on when you'll need the money. Achtermann recommends using a very low or no transaction cost ETF, such as those offered by Betterment, Wealthfront, Vanguard, Fidelity, Charles Schwab and TD Ameritrade.

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Question 3: Can I weather the ups and downs of the market?

This last question addresses risk.

If you think you will need the money in the near-term (less than two to three years), avoid investing it because of the additional risk you take on by putting your money in the market. Instead, put this cash into a savings account that offers more security.

For your longer-term goals that allow you to take on more risk put that money in the market. Experts generally suggest that you can be most aggressive with goals that are well into the future (beyond 10 years), then dialing back the risk for near-term goals.

"If you have a longer horizon, then you may be able to handle the volatility," Cole says. "What you want to avoid is having your money subject to risk when you actually need the money."

If you answered "no" to any of the above, then focus on saving

If you went through the above three questions and answered "no" to any of them, you might not be ready to start investing your cash. Instead, focus on saving. Saving is ultimately the first step to investing because, without it, you're not ready to take on the risk of putting your money in the market.

To make sure you are earning the greatest return on your savings, especially when you are relying on it as an emergency fund, use a high-yield savings account. Just make sure the one you choose has no monthly fees, low (or no) minimum balance requirements and an interest rate (referred to as "annual percentage yield," or APY) that's higher than a normal savings or checking account — like all of our top picks do:

• Best for checking/savings combo: Ally Online Savings Account
• Best for easy access to your cash: Synchrony Bank High Yield Savings
• Best for earning a high APY: Vio Bank High Yield Online Savings Account
• Best if you want extra help saving: Varo Savings Account

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.

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