The “Bucket” Method
Think of your money in terms of different buckets. Put money into each bucket depending on when you will likely need that money. Do you really need every dollar available immediately? Or is some of it longer-term? Money in longer-term buckets have more investment options, and potentially higher rates of return.
Shorter-Term
Money that you need in the next five years should be in lower-risk investments. This is your emergency money, funds for a new car in three years, and regular income if you are at or near retirement.
Appropriate investments include savings, money market accounts, and short-term US Treasuries or CDs for money you need very liquid. Lower-risk bond funds may be used for money you don’t need for two or three years. Fixed rate annuities are useful for money not needed for two or more years.
Medium-Term
Money not needed for five or more years can still be in lower-risk investments, but you can consider adding some risk to try for better returns.
Appropriate investments include bond funds with lower credit quality and longer duration. Longer-term fixed annuities typically offer a better rate, but a longer commitment period. You can also add stock Exchange Traded Funds (ETFs) and mutual funds.
Longer-Term
Money not needed for 10+ years should in theory be invested in the stock market using ETFs and mutual funds. It’s certainly not required if you are not comfortable with the risk, but you should seriously consider the potential upside of taking risk.
Take a look at historical returns for the S&P 500, a broad measurement of how larger U.S. stock have performed.