So you're ready to begin socking away money for a rainy day. Excellent! You should generally aim to have between three and six months' worth of living expenses in your emergency fund. Here are some investment options to avoid with short-term money:
Retirement accounts: Tempted to take out loans from your 401(k) or withdraw contributions (the money you've deposited) from your Roth IRA penalty-free? Unless you are willing to develop a taste for cat food, don't shortchange your future. If you absolutely must, though, take the loan, because you can't replace borrowed Roth contributions. (Though there are situations where the Roth money is preferable, as explained in Roth IRA as Emergency Fund.) Don't even consider taking money out of a regular IRA unless you like donating around half of it to Uncle Sam in the form of taxes and penalties.
Collectibles such as coins and antiques: If you need to raise funds from collectibles in a hurry, the sharks smell blood in the water, and you are less likely to get a good price for Great Aunt Betsy's Colonial-era sewing kit.
Long-term bonds: When you buy a bond, you are guaranteed a set amount of interest plus the return of your principal on the maturity date. Before that, all bets are off. If you want your principal back before the maturity date, you have to sell the bond for the going price, which could be less than the face value. The longer the term, the more sensitive bond prices are to interest rate changes.
Your family: Yeah, you've got a lot invested in those kids, and you might get a nice price for them on eBay
The Big No-No, the Stock Market: Ask yourself: Why do stocks pay more than fixed-income investments over the long run? Because sometimes (the years 2000-2002 come to mind) stocks pay LESS over the short run. An average annual return of around 4% is a reasonable average for fixed-income investments. The market does better than that most of the time, but not always: From 1926 to 2000, the market returned less than 4% in one out of every three years, and most of those sub-4% returns were negative.
If you are saving for a down payment on a home, car, college, or new chin in the next few years, there is a significant possibility that a stock market investment will be in the red when the time comes to buy.
Learn much more about your short-term savings options in our Savings Center, which also features some special low-interest-rate deals for Fools.
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