3 questions that will help you decide where to save in today’s high-rate environment

Choosing where to invest your hard-earned cash isn’t a simple decision. And with so much uncertainty in the stock market and rising interest rates, it can feel more complicated than normal. Right now, high-yield savings accounts (such as the LendingClub High-Yield Savings account) and CDs are more appealing than they were a few years ago when rates were low. With rates rising, “it’s making short-term cash alternatives… more attractive. And it’s turning the tide a little bit more toward savers,” says Jose Hernandez, a financial educator and founder of Financial University. However, interest rates tend to have a bigger influence on short or mid-term planning, not long-term decisions. “Long term, if you’re following sound principles of investing, what we’re seeing right now in the economy, interest rates and everything across the board, is really not material,” Hernandez says. So what does that mean for your saving and investing decisions? To help you navigate today’s environment and figure out the best path forward, CNBC Select spoke with personal finance experts, Jose Hernandez and Garrett Jones, a certified financial planner with Crossroads Planning.

3 questions to ask yourself to help you decide where to put your money to work

Should you be saving your money in a high-yield account or CD? Or putting it into traditional investments like index funds or exchange-traded funds (ETFs)? “It’s not really a cookie-cutter answer because it depends on a couple of different variables,” Jones says. Your goals, how much risk you’re comfortable with and the debt you have can all factor into your savings and investment choices. Before making any big decisions, you should get together with a trusted financial adviser or planner and answer these three questions.

What are your goals?

What you want to spend your money on — and when you want to spend it —may be the biggest factor in deciding what savings vehicle is best for you. A basic rule of thumb is that investing in the stock market is better for long-term goals, while savings accounts and other bank products are better suited for short-term goals. A high-yield savings account, for example, gives you a guaranteed rate of growth and immediate access to your money anytime you want. Other products such as CDs or money-market accounts offer varying degrees of liquidity but share with high-yield savings accounts the safety and stability that makes them ideal for goals such as a down payment on a house, a family vacation or a home renovation. If you’re planning on spending the money within approximately three years from now, you can’t depend on that money growing significantly in the stock market and should consider putting your cash in one of these vehicles. CNBC Select ranked the First National Bank of America one-year CD as the best one-year CD. And for money market accounts, we selected Ally’s as the top choice for that type of account. For long-term goals where you won’t need the money for 10+ years (think retirement or your child’s education), other types of investments can earn you a higher rate of return. Although the stock market has been down recently, it has historically earned higher returns over the long haul. And when markets are down, investments are cheaper. “There’s a saying in our industry, during a bull market, everyone makes money. During a bear market, this is when people make millions,” Jones says. Low-cost index funds can be an easy way to create a diversified portfolio because you’re essentially purchasing a wide swath of stocks designed to mimic the overall market. ETFs provide more diversification than purchasing an individual stock. ETFs are also more tax efficient than traditional mutual funds that are actively managed, according to Jones. With a mutual fund, you may inadvertently end up with a tax bill for capital gains because of the trades made by the fund’s managers. You have several options when it comes to starting your investing journey, from opening a traditional investment account with a brokerage like Charles Schwab and Fidelity to robo-advisors like Wealthfront. Just make sure you go with a method you understand and are comfortable with. And if you’re unsure how to start investing for your long-term goals, talking with a professional advisor can be a good way to get personalized investing advice.

What’s your risk tolerance?

Choosing where to save your money isn’t just about the cold, hard numbers. You also need to take into account your comfort with risk, as different savings vehicles come with varying amounts of volatility. “If I am more risk averse, meaning I don’t want to have my money floating around going up and down drastically day in and day out, then safety and security become my primary focus,” Jones says. In that case, you may want to shift some of your savings into low-risk products. High-yield savings accounts and CDs have low risk because both are FDIC insured for up to $250,000, so even if the bank fails you’ll get your money back. Government bonds, like I-Bonds and Treasury bonds, are also considered low-risk investments because they are backed by the U.S. government. The safety of those vehicles comes with tradeoffs. The rate of return on high-yield savings accounts is lower than the rate of inflation. So even though you’re making money, it’s still losing value — just at a slower rate. If you’re losing sleep over your investment strategy, Jones recommends talking with an advisor to see if there’s a better asset allocation for you.

Do you have high-interest debt?

When deciding how to save and invest your money, you’ll want to balance your choices with paying down your existing debt, especially if you have high-interest debt like credit cards. The average credit card interest rate is nearly 20%, which is four to five times higher than the best rates you’ll get with a typical high-yield savings account or CD. For example, if you save $1,000 in a high-yield savings account at 4% interest you’d earn about $41 in a year. But in that same year, a $1,000 balance on a credit card with a 20% interest rate would cost you roughly $170 (assuming you make only the minimum payments). In this type of situation, you can save the most money by paying off your high-interest debt. “I know it’s not as fun as building assets,” Hernandez says. But if you’re flooded with high-interest debt, “it may make sense to at least get that more manageable and then when you’re in a position where you have more cashflow you can start investing.”

Bottom line

When you’re deciding how to save or invest there’s no one-size-fits-all answer. The best choice for you depends on your wants and personal circumstances. With interest rates high, high-yield savings accounts and CDs are becoming more attractive options for short-term goals. However, over the long term, investing in the stock market through index funds or ETFs has historically provided better returns.