The suits in the financial world spend a lot of time and advertising dollars telling us where we should invest our money. But when it comes to saving for short-term goals, most of us stick with tried-and-true methods, whether it's under the mattress or in the bank.
And that's smart: Investing and saving are very different activities. Stocks are a fine place to invest for a retirement that's decades away, but you'll need a more secure home for money you'll want in the next few years.
Still, that coffee can in your freezer might not be the best place for you to stash your cash.
Gathering really large sums, such as a down payment for a home, can be a daunting task for young, cash-poor workers, so it pays to choose your savings method carefully. A better rate can shorten the time it takes for you to reach your goal, so look for a competitive yield when shopping for money market accounts, funds and certificates of deposit.
"It seems like investors could reasonably reach for yields in the 4 percent range without taking on undue risk," said Christine Benz, associate director of fund analysis at Morningstar Inc. "That's better than it's been in a long time."
If you're saving for something as long as five years away, you might consider an intermediate-term bond mutual fund. Look for one with low costs and an opportunistic manager with a good record.
Morningstar's short list of favorites in this category includes Dodge & Cox Income (DODIX), with impressive trailing 5-year returns of nearly 6.88 percent. A low-cost option would be Vanguard Total Bond Market Index (VBMFX), which has trailing 5-year returns of 5.78 percent. Keep in mind that some mutual funds may require initial minimum investments of $2,500 or more.
If you have a shorter timeframe, or are looking for a good place to keep emergency funds, you might prefer something more liquid. Savings accounts offered by traditional banks are easy to open, and usually have very low minimums. They also tend to offer some of the lowest rates of return.
A good alternative to this are money market accounts, where yields have been on the rise lately, reflecting steady rate hikes ordered by the Federal Reserve since June 2004. It's not hard to find money market yields of 3.5 percent to 4 percent, or higher.
If you have a brokerage account, you might find yourself plunking extra cash in a money market mutual fund. Unlike savings and money market accounts, money market funds are not covered by the Federal Deposit Insurance Corp. (FDIC), but that's OK, as the risk is minimal. Just be sure the expenses are low - preferably no more than 0.40 percent per year - and the yield is competitive.
Certificates of deposit, or CDs, pay even higher yields, but the drawback is that they are less liquid than the money market. When you purchase a CD, you are essentially lending a fixed amount of money to a bank for a set period of time; if you withdraw early you'll likely lose interest and pay a penalty.
Regardless of the deal you find, the hard work of saving money still will be up to you.