Say youve got a little extra cash. Now you have to decide whether to save or invest it. The answer, surprisingly, doesnt come down to how much money you have. These days, when you can jump into investing on an app with no transaction fees and low ongoing costs, you dont need to have a big, round number like $1,000 or $5,000 before you can invest. The key number is time, not a dollar amount, says Stuart Ritter, retirement insights leader at investing company T. Rowe Price. The simple rule: If you need the money in the next three years, then save it. As soon as you decide that the money will be used after that time period, then start thinking about investing in something that will grow more, like stocks or bonds. This is important to consider because it comes down to risk. When you put money in a savings account, youre guaranteed to maintain the balance you deposited, plus a small amount of interest, and the funds are insured in the unlikely event your bank ends up failing. Most important, you can use the money anytime you want without worrying about losses or ending up with a tax bill. In todays economic environment, however, the interest on savings doesnt go very far. Thats why so many people whove never invested before are considering it now. Even as rates climb, savings account interest rates still lag inflation, and so the money you keep in those accounts may not keep pace in the long term. A dollar today may only buy the same amount as 82 cents in 10 years, if the inflation rate averages 2% a year. It may buy even less if inflation stays high for some time. On the other hand, investing is not a guaranteed return. While youll have protection akin to FDIC insurance for institutional failures, you wont be protected against loss if your holdings go down in value. The stock and bond markets are often volatile, and you have to be prepared for the reality that you may lose moneyeven a percentage point drop in a day could be significant to you. Its important to understand theres no free lunch, says Ritter. So how do you decide what to do? There are dozens of different accounts and financial products to choose from. We talked to financial advisers to help make sense of it all. Your first step is settling on a goal. Then you pick the account that will help you meet it. Read on to find out more. Checking account: For money you need this month Your strategy is: Saving The tool you need: Checking account Heres what to do now: Put money for your day-to-day spending and bill-paying here. That money should be your transactional monthly spending, but not much more, says Mike Reust, president of Betterment, a registered investment firm. But you also dont want to play it too close to the edge and incur any fees for overdrafting. Even as many banks have scaled back on onerous charges for not having enough cash to cover your purchases, there may still be some penalties. The key to this is to track your budget, either with a do-it-yourself budgeting method or an app that can help you keep track of your finances, and then assume youll need to have at least 25% beyond your monthly needs just to make sure you can cover your checks. High-yield savings account: For six months of emergency savings Your strategy is: Saving The tool you need: High-yield savings account Heres what to do now: Set aside three to six months in cash for emergencies, which is the amount experts recommend. Some people may want to keep more: Early retirees, especially, like to have up to two years of cash on hand, says Rose Swanger, a certified financial advisor from Nashville, Tenn. Thats because they have less time to wait for markets to rebound. If retirement is much farther away, you may want to keep a bare minimum in this account, and invest more for the long-term. You should also automate your savings, which is a powerful psychological tool. You can direct a portion of your paycheck into a savings account, or you can set up an automatic deduction once it hits your checking account. Money you dont see is money you dont spend, says Swanger. She recommends keeping your high-yield savings account at a separate bank from your checking, so its even further separated from your regular spending. If youre shopping for a new account, you can find Buy Side from WSJs picks for Best Savings Accounts here. CDs, I Bonds: For big expenses in two to three years Your strategy is: Saving The tool you need: CDs, I Bonds Heres what to do now: If youre planning on buying a house in a couple of years, youll of course want to do something different with your money than if your goal is to pay for your childs college in 18 years. Again, its all about your timeline. For an interim goal that is longer than just emergency savings, Nolte suggests considering a certificate of deposit, or a series of these that you buy as you save up for individual purchases like a new car or a big trip. You can open an account online with a few clicks directly from most banks or investment brokerages, like Fidelity or Chase. Your money will get locked in for the time frame you select, from three months to several years. Nolte also suggests looking at I Bonds, which are offering high returns right now because theyre correlated with inflation. You buy these directly from the government, and your money is locked in for one year, with small interest losses for withdrawing before five years. Brokerage or robo advisor: For money youll want to spend in about 10 years Your strategy is: Investing Tools: Brokerage account or robo advisor Heres what to do now: If you have your monthly expenses covered, plus six months of emergency savings tucked away, and you still have cash you dont need to tap into for a decade, investing can be a good choice. Your first step should be to assess your feelings around money and risk. You can take a risk tolerance survey to match your psychology to your strategy. Nolte finds this question useful: Would it bother you more to have 100% in cash and see the market go up, or have 100% in the market and see it go down 29%? Knowing your risk helps you choose a portfolio, which could be 60% stocks and 40% bonds, for instance, or some other configuration. If youre 22, your time horizon for retirement is so long that what happens in a short period of time is irrelevant. says Ritter. Youve got 40+ years, so it all gets invested in stocks. Most investing, just like savings, can be done with a few clicks online. You put in the ticker symbolsuch as VTI for the Vanguard Total Stock Market Index Fund ETF, one of the most popular exchange-traded index fundsand hit buy. If youre wary of investing on your own, most investment services firms offer robo advisor services, which will assess your financial picture and suggest a mix of investments for you, or access to professional advisors. Fees will vary based on the service and your account balance. A 401(k), 403(b) or IRA: Securing your future retirement Your strategy is: Investing The tools you need: 401(k), 403(b), IRA Heres what to do now: If youre working, make sure youre using an account like these to save for retirement. The goal is to fill your 401(k), or other eligible workplace plan like a 403(b), and contribute at least as much as your company matches, says Nolte. Consider setting up the feature that automatically escalates your contribution level every year, usually by 1%. Anything you dont have to think about will help you. If the boss matches you at 4%, then save at least 5%thats one days lunch money, says Swanger. When I get clients to do this, a year later, they dont even feel theyre putting money into saving. She adds: Thats when I say, then increase it by 2% or even 3%. If your company doesnt offer a plan and you have earned income, you can start your own IRA or Roth IRA at an investment firm and invest up to the yearly limit set by the IRS. There are also various options for self-employed retirement accounts that have higher limits. Swangers advice is to keep these investments simple. Her general rule is that if you have $100,000, it should be in just two or three funds, like a general stock fund, a bond fund and an international fund. For one thing, each investment comes with its own fees, and you could owe taxes every time you transact, even if youre not paying cash just to trade. Even if retirement seems a far-off goal, youll benefit from compound interestfill your numbers into this calculator to see potential future earningsby using these accounts. The advice, recommendations or rankings expressed in this article are those of the Buy Side from WSJ editorial team, and have not been reviewed or endorsed by our commercial partners.

Read this article and offer your perspective on when you hope to be able to save and/or invest.