You will find plenty of advice about which stocks are hot and how to invest money in the market. However, many of these conversations leave out an important consideration: Why are you investing?

When you look at investing, time horizon is one of the key things a planning professional will want to know, says Dan Yu, managing principal at EisnerAmper Wealth Advisors in New York City. Time horizon refers to when a person expects to need the money. Cash for next years vacation needs to be treated differently than cash for a retirement 20 years down the road.

Elliot Omanson, managing partner at Sage Financial in Kansas City, says the biggest mistake people make is lumping all their money into a single account or fund. A better way starts with understanding how much money is needed for various goals. Know the purpose of your account, he says.

Once that purpose has been identified, you should use different investment strategies depending on whether your money is being put away for the short term or the long term.

Saving for the Short Term

When it comes to money for short-term goals, finance experts say people should focus on saving rather than investing. Money needed in fewer than three years needs to be protected from market volatility.

Short term is where people make mistakes, says Oliver Lee, owner of The Strategic Planning Group in Lake Orion, Michigan. They see the bright light that says 6 percent and jump in. However, those types of returns usually require people to take risks they shouldnt with money that will be needed shortly.

For short-term goals, use the following options instead.

High-yield savings accounts. People should forget about investing money needed in the very short term. Its hard to find an investment worth putting your money in for six months to a year, Omanson says. Instead, find a high yield savings account to keep money safe and instantly available. The best high-yield accounts only pay slightly more than 1 percent interest, but for this cash, stability is more important than gains.

CD ladders and money market accounts. You may be able to earn slightly more by placing money in a certificate of deposit rather than a savings account. However, the best rates are only available if you agree to tie up your money for at least a year or more. To keep cash liquid, some people set up CD ladders with varying maturity dates. This approach ensures at least part of the savings will be available at any given time.

Money market accounts can offer comparable interest to some CDs and come with fewer restrictions. However, you may be allowed only a limited number of withdrawals from the account each month.

Short-term bond funds. Once a persons time horizon moves past 18 months, it begins to make sense to place money in relatively stable investments. Short-term bond funds are one way to increase returns with relatively little risk.

Still, the gains on these funds are minimal compared to other investments. Ten-year annualized returns for even the best bond funds hover around 2 to 4 percent. Accept the fact that the money is not going to grow a lot, says Steven Martin, director at BKD Wealth Advisors in Oakbrook Terrace, Illinois.

Fixed income funds. Similarly, fixed income funds offer a relatively stable way to get a return greater than that offered through savings or money market accounts. Many of these funds include bonds, but they may also include other securities.

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