Rex Moore from The Motley Fool has posted Four Rules for Asset Allocation. It’s a quick general overview of where you should keep or invest money based on when the funds will eventually be needed.
Rule No. 1: If you need the money in the next year, it should be in an interest-bearing savings or money market account.
I prefer ING Direct and Emigrant Direct but there are some banks that offer even higher interest rates. Money market accounts are FDIC-insured up to $100,000 per bank per individual, which means your money is safe, and you will be paid the interest owed. You are insures up to an additional $100,000 if you open a joint account, by the way.
Rule No. 2: If you need the money in the next one to five (or even seven) years, choose safe, income-producing investments such as Treasuries, certificates of deposit (CDs), or bonds.
Right now, I have no money in these investments. If I can build my cash reserves up this year, I will put some money in CDs or Treasuries. I have some obligations to deal with in the mean time, such as a student loan and a car loan.
Rule No. 3: Any money you don’t need for more than seven years is a candidate for the stock market.
A lot of my money is socked away for retirement, an event much more than seven years away. Based on average historical data, over long periods of time the stock market will beat inflation, and according to some, real estate appreciation.
Rule No. 4: Always own stocks.
The sooner you’re in the market, the better.