Published on Fri May 24, 2013

By Maryalene LaPonsie

Is your emergency fund hanging out in the same place as your retirement savings? If so, it may be time to rethink your savings strategy. Finance experts say choosing the right account for your money is critical to meeting your goals.

Money for a car in five years should be saved differently than money for retirement in 25 years, says Matt Curfman, a Certified Financial Planner with Richmond Brothers in Jackson, Mich. The timeframe for when you want or need that money dictates where it goes.

In other words, it’s nearly impossible to maximize your savings if you haven’t distinguished your long-term goals from your short-term goals.

Good short-term savings options

According to Mark VandeVelde, a Certified Financial Planner and Wealth Partner at Hefty Wealth Partners in Auburn, Ind. short-term savings should include your emergency fund as well as any looming expenses.

We typically recommend three to six months of expenses — three months for a two-income family and six months for a one-income family — plus any known expenses in the next 24 months, VandeVelde says.

For example, if you expect to replace the roof on your house in the next year, that money should be set aside along with your emergency fund. Since the goal is to keep this money accessible, VandeVelde recommends using savings accounts and perhaps CDs for this fund. Curfman agrees, saying a high-yield savings account can be a good option.

While VandeVelde does not recommend investments for short-term savings, he does say a diversified investment portfolio can be appropriate for intermediate goals.

Allocate it conservatively, VandeVelde advises. The goal is to outpace inflation with minimal risk.

Saving for retirement, college and other long-term goals

When it comes to long-term goals, retirement tends to top the list. Both experts agree workers should look to their employer when it comes to retirement savings.

The very first place to look is a 401(k) or a 403(b) with a match, says Curfman. Don’t give up that free money.

Workers under age 50 can contribute up to $17,500 to their 401(k) account each year, although your employer may only match up to a certain amount or percent. Once you have maxed out the employer match, you may want to consider other retirement fund options, such as a Roth IRA.

Roth IRAs have income limits and lower contribution limits — $5,500 per year for those under age 50 as of 2013 — but they have the advantage of growing tax-free. Deposits to a Roth IRA cannot be deducted, but there are no taxes on money withdrawn after age 59 .

Traditional IRAs are another option. Money deposited in the account can be deducted now, but withdrawals at retirement time are subject to taxes. VandeVelde says Roth IRAs tend to be more popular, but traditional IRAs may make sense for those close to retirement age.

As for college savings, Coverdell Education Savings Accounts and 529 Plans are both options that come with tax advantages. However, money from these accounts must be used for educational purposes.

Curfman suggests using a Roth IRA as an alternate way to save for college or other long-term expenses. Although any gains made by the account should not be withdrawn until age 59 , he notes the contributions made to a Roth IRA can be withdrawn tax- and penalty-free any time after five years. The money placed in the account can grow tax-free to help pay for retirement, but the contributions can be withdrawn as needed to pay for college or other expenses.

For other long-term goals that don’t fit into the retirement or college categories, a general investment account may be your best bet.

If your goal is more than five years out, you could do a portfolio of stocks and bonds, says Curfman.

Consider taxes and contribution limits when planning

Be aware that tax laws and contributions can and do change over time. Consulting with a financial professional can be a smart move when crafting your savings strategy, because there are opposing things to consider in virtually every approach.

Every (savings) vehicle has disadvantages and advantages, says VandeVelde. If you don’t choose the right vehicle, you won’t reach your goals.