FINANCIAL ADVICE | managing your money

Savings vs. Investments: Balancing Return with Liquidity

Published February 12, 2019

Key Takeaways

  • It's a good idea to put your excess money to work.
  • One of the most common reasons why you save or invest money is to achieve future goals.
  • Financial experts advise that you diversify your savings and investment portfolio.

If you're reading this, you likely have money left over after expenses, and you're wondering what to do with it. Maybe you just got a well-deserved raise, have encountered a windfall, or your efforts to stick to a budget have paid off. Whatever the case, congratulations!

Let's talk about sound money management and choosing the mix of saving and investing that's right for your situation. When thinking about money management, the two major concerns people have are the return on investment and liquidity of funds.

It's a good idea to put your excess money to work. That means that you add a growth component to your savings, which will offset the effects of inflation with a return on your investment. The amount your investment will grow is based on your tolerance for risk combined with the length of time you are willing to invest without being able to access it, which is known as liquidity.

Short- and long-term goals

One of the most common reasons why you save or invest money is to achieve future goals. Some are goals you'd like to accomplish within the next five years — the short term — and some you'd like to accomplish in the next ten years or longer — the long term. Your approach to saving for the long term will look different from your approach to saving for the short term.

Conservative vs. risky investments

People who save and invest for the short-term typically choose safe, or conservative, financial products. That's because they need to access that money soon and should any of it be lost to a risky investment, there isn't enough time to build it back to where it once was. However, as a trade-off, short-term products usually come with modest interest rates. Conversely, you may be willing to incur additional risk with longer-term investments.


In addition to time, interest rates are dependent on the level of liquidity, or your ability to access your funds. You will see a higher rate of interest the less liquid your funds are. So, you will see lower interest rates from more liquid financial products. There's a difference in liquidity between various short-term financial products; some offer flexibility to access your funds immediately (typically within a day or two), others restrict access with penalties for early withdrawal.


Financial experts advise that you diversify your savings and investment portfolio, a strategy using a mix of financial products with different terms and liquidity. That way you will be able to achieve your short- and long-term goals while achieving a rate of return.  

Savings accounts

Your credit union offers a standard savings account that keeps funds separate from your everyday-use checking account. Savings accounts typically yield a negligible interest rate but are seen as the safest place for your money because it is immediately available. Deposits up to $250,000 are insured by the National Credit Union Administration (NCUA). 

Your credit union may also offer a high-yield savings account, which requires you to make a minimum initial deposit and requires that you maintain a minimum account balance to qualify for the higher interest rate. 

Money market accounts

Your credit union offers money market accounts that feature interest rates that are competitive with standard savings accounts. These accounts may require a higher initial deposit and a higher minimum balance than high-yield savings accounts. You can access your money market funds quickly through check or the use a debit card associated with your account. However, you are limited by Federal Reserve rules to six of these types of transactions each month. A money market account is an ideal place for your savings because it is a safe place for your money (deposits up to $250,000 are insured by the NCUA), and your funds are available should you need to access them in the event of an unexpected expense.

Certificate of deposit

CDs are similar to savings accounts; however, they have a set date for maturity — the date that you will be able to access your money — which ranges from a month to 5 years. CDs generate a fixed interest rate, which depends solely on the date of maturity. In other words, your credit union will offer a lower interest rate for shorter-term CD, and a higher interest rate for a longer-term CD. CDs are the preferred savings product offered by your credit union because they are free from risk (the NCUA insures deposits up to $250,000) and because they feature the best interest rates. 

Because CDs offer a wide range of maturity dates, you control the liquidity of your money. One strategy that keeps a portion of your money liquid while another portion earns a higher rate is to acquire multiple CDs at varying maturity dates. This is called CD laddering. 

Exploring how much you should save

Experts recommend that you maintain 4 to 8 weeks of living expenses in your checking account, and then add about 30 percent more as a buffer for unexpected expenses. Money remaining should be kept in an interest-bearing savings account. This account should be used to buffer your checking, for expected expenses or unexpected expenditures. Once you have saved enough to cover about 6 to 9 months of your expenses, it's time you consider your investment options. 

Investment options

Investing is the process of using your money to buy an asset that you think will generate an acceptable rate of return over a period of time. You trade risk, time and liquidity for a return on your investment. 

If you have some long-term financial goals, such as college education or retirement, it's a good idea to put a little money away each month where interest accrues over the long term. Investment vehicles designed for these goals include IRA or 401(k) retirement accounts, mutual funds, and college 529 savings plans. 

There are a significant number of investment opportunities

Each comes with its level of risk and liquidity. They include stocks, real estate, bonds and many more. Any investment is subject to risk. Some institutions offer an investment-grade certificate of deposit and money market accounts that are not insured. Uninsured investments are subject to risk, and you may lose gains you've made in interest, and you could lose some or all of your principal investment should the investment fail to perform. 

Sound money management will help you achieve your future goals. Knowing how much to put aside to cover your expenses will help you determine how much is left over to invest. Your comfort level for factors like the safety of your investment and your funds' liquidity will help you decide the best investment opportunities for you.

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