Where Should I Park the Money to Buy a Car in 2-3 Years?

If you’re planning on buying a car in two to three years, the best place to park your money is in cash. This is because you need to have liquidity and not put your funds into an investment asset that may be volatile in the marketplace. Even though the S&P 500 may turn out to be outstanding, where you’re getting 10% to 15% more than you would with cash, it could also cut the other way where you could lose 20% to 25% of that purchasing power. So, investment assets don’t really hold up when you have a finite goal.

Cash is your friend when you have a finite goal within five years. However, if it’s not a finite goal and you might need to replace a car at some point in the future but it might be five years or it might be seven years, you can be a little more aggressive with how much you save in cash versus how much you save into a different bucket.

It’s important to focus on maximizing your cash, as there is a broad difference from the way financial institutions are paying their customers for cash. For example, if you go to a typical brick and mortar bank, their savings account might be at 20 to 30 basis points or point two to point three percent. Meanwhile, if you go look at online banks like Ally.com, they’re paying close to 2.5% now and they do a pretty good job of keeping up with where interest rates are.

If you’re talking about a car, you’re not talking about a six-figure purchase, but it is important for those of you who run really fat cash reserves. If you’re in a high income tax situation, where your emergency reserves might be over a hundred thousand dollars, do recognize that there are accounts that pay more for a hundred thousand dollar minimums. For example, Fidelity Investments right now has a cash reserve that is like 2.5%, but if you have a hundred thousand dollars, they have another money market that will be like close to 3%.

In conclusion, if you have a two-year goal, the best way to maximize your cash is to look at your current institutions and if they are under-appreciating your relationship and not giving you a good yield on your cash, then go figure out if there’s an online or investment option that still keeps it as cash but also pays you more where the market is right now in this higher interest rate environment.