One of the Foolish denizens of our discussion boards, chiefzealot, had a dilemma this summer. He had drawn up a plan to save a specific amount of money each month over the next five years, but he was torn over what to do with the cash.
"What questions should I be asking myself to figure out where to put this money?" he asked. He put that query to the Fools on the Budgeting discussion board, who came up with a lot of good questions and some equally good answers. Here's a summary:
When do you need to use the savings?
If you're stashing away money for a goal you want to achieve in the next five years, keeping the money in a safe place, like a CD or savings account, is your best bet. But if your time horizon is longer, say 10 or even 20 years, you might take a look at riskier investments like stocks and mutual funds.
What's the moneyfor?
Ask yourself whether you need to be certain that every cent you've stashed away must be available when you need to draw on your reserves. That might be the case if you're hoping to buy a car or put a down payment on a house. That argues for putting the money someplace very safe, like a savings account or CD.
Say, instead, you're saving to send Junior Fool to college. In cases when you're willing to trade a little risk for a higher reward, look more closely at investing the money in individual stocks or mutual funds. This route will subject your hard-earned cash to the ups and downs of the market, but stocks are a great place to put your long-term savings.
Let's say you've simply decided to stop spending all your money at the mall and invest, instead, in a portfolio of consumer stocks, like Gap (NYSE: GPS ) , Bed Bath & Beyond (Nasdaq: BBBY ) , and American Eagle Outfitters (Nasdaq: AEOS ) . Opening a brokerage account and depositing your money there will leave it ready for action when you decide to invest.
What does the rest of your savings portfolio look like?
If you don't have an emergency fund before you embark on this savings goal, consider keeping a portion or all of your stash in a very liquid investment. Having a cash cushion available for those unforeseen dishwasher breakdowns or transmission repairs can prevent you from reaching for the credit card in times of distress.
If you already have an emergency fund at your fingertips, look more closely at savings options that may be harder to liquidate, like CDs or bonds.
What size is your monthly savings target?
If you're saving $1,000 every month, it may make sense to start looking at frequent investments in CDs or Treasuries. But if you're saving $50 or $100 each month, it could be a hassle to find someplace other than a savings account to put a small contribution. In that case, high-yield savings accounts can be an easy path to save a lot.
What's your money personality?
Are you the type to put your savings deposits on autopilot and forget about it, to be pleasantly surprised at the balance a few months later? Or do you scrutinize your bottom line and your investment returns every few weeks? Pick a place to put your cash that reflects your investing temperament. Don't force yourself into a high-maintenance plan if you know you don't have that much time to spend on money matters.
You can read the entire thread here, and learn that chiefzealot is hoping to buy a house with his carefully saved dollars. You can also learn a lot more about savings at the Savings Center. The center walks you through the importance of an emergency fund, and it also has detailed explanations of the many places to put your hard-earned dough.
Related fun with savings:
American Eagle, Bed Bath & Beyond, and Gap areStock Advisorpicks. Find out Tom and David Gardner's two top picks -- and Wall Street's dirtiest secret -- when you snag a copy of our free report. Gap and Bed Bath & Beyond are alsoInside Valueselections.
Fool contributor Mary Dalrymple does not own shares of any stock mentioned in this article, and she welcomes your feedback. The Fool has a disclosure policy.