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I am in the process of saving money for a different car. I already have $5000.00 saved and am planning to save at least $5000.00 per year until I buy the car. So obviously some of this money will be parked for a while. I have always heard and agree with the idea that if you will need the money in 5 years it should not be in the stock market. Passbook savings accounts don't generate much interest. Should I use CDs, low risk mutual fund, bonds or some combination of all?

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Bond aren't necessarily any safer than the stock market. Ultimately, there is no such thing as a low risk mutual fund.

You want something that will allow you get at your money relatively quickly.

In other words, CDs (since you you can pick a definite time period for your money to be tied up), money market account or just a plain old savings account.

Basically, you want to match inflation and have easy access to the money. Any other returns on top of that are gravy, but don't fret too much about it.

See also:

Where can I park my rainy-day / emergency fund? Savings accounts don’t generate much interest.

Where should I park my rainy-day / emergency fund?

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    Disagree somewhat. Bonds (outside of US Treasury bonds) are never completely safe, true... but they are significantly safer overall than the stock market, and the inflation/interest rate risks exist with CDs as well. An intermediate-term corporate bond fund or ETF (e.g. NYSE:BIV) has yields around 3.8% to your savings/CDs' ~1.2%. You might have lost ~10% if you needed to cash out during the credit crunch, but that's a nice premium. You can always choose a mix of assets - put your first $5k in bonds since it's longer-term, and put more in savings / CDs as you get closer to buying. – user296 Aug 12 '10 at 18:18
  • @fennec You make a good point about bond ETFs, as one concern is having quick access to your money when saving for a purchase in the near term. That said, the bond market can get pretty sketchy at times and there's a good chance that might occur around the same time that you may find a good deal on that planned purchase. Ultimately, it boils down to what risks you are willing to take. – George Marian Aug 12 '10 at 19:39
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As you're saving up for an expenditure instead of investing for the long run, I would stay away from any sort of "parking facility" where you run the risk of not having the principal protected. The riskier investments that would potentially generate a bigger return also carry a bigger downside, ie you might not be able to get the money back that you put in.

I'd shop around for a CD or a MMA/regular savings account with a half-decent interest rate. And yes, I'm aware that the return you might get is probably still less than inflation.

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Nothing's generating a whole lot of interest right now. But more liquid and stable is better (cash or cash-like).

But a related question: Why a new car? You can knock thousands of dollars off of the price of a comparable vehicle by buying one that's one or two years old. Your new vehicle loses thousands of dollars in value the moment it goes off the lot.

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    I will decide whether to buy a new or used car when the time comes to purchase. I should have said different car. – mpenrow Aug 12 '10 at 12:07
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    Oh ok ... you meant "new" as "new to you." That's fair enough :) – mbhunter Aug 13 '10 at 6:42
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I would split the savings as you may need some of it quickly for an emergency. At least 1/2 should be very liquid, such as cash or MMA/Checking. From there, look at longer term CDs, from 30 day to 180 day, depending upon your situation. Don't be surprised if by the time you've saved the money up, your desire for the car will have waned. How many years will it take to save up enough? 2? 5? 10? You may want to review your current work position instead, so you'll make more and hopefully save more towards what you do want.

Important: Be prepared for the speed bumps of life. My landlord sold the house I was renting out from under me, as I was on a month-to-month contract. I had to have a full second deposit at the ready to put down when renting elsewhere, as well as the moving expenses. Luckily, I had done what my tax attorney had said, which is "Create a cushion of liquid assets which can cover at least three months of your entire outgoing expenses."

The Mormon philosophy is to carry at least one year's worth of supplies (food, water, materials) at all times in your home, for any contingency. Not Mormon, not religious, but willing to listen to others' opinions.

As always, YMMV. Your Mileage May Vary.

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