If you are lucky enough to have some cash that you need to park for short while, you may be wondering about your best options. It seems like all the financial institutions want to take it off your hands, but the range of incentives they offer you will vary widely. Experts say that the best short-term saving methods will match your needs in terms of access (how often you'll need to use the account), interest rates, customer service, and penalties (in case you need to get the money out earlier than usual). Read on to find out the pros and cons of some of the best short-term savings options.
Checking accounts: Typically, checking accounts don't pay much in the way of interest. Another con is that because they are vehicles for transferring money, banks will often charge you fees for the privilege of use. Pros of checking accounts are that your money is always accessible by writing a check, visiting a branch office, or pulling it out of an ATM. Plus your money will be insured by the Federal Deposit Insurance Corporation (FDIC).
Savings accounts: This traditional place to stash away money is now notorious for paying ridiculously low interest rates; in fact the joke is that a mattress may offer better yields. However, your money is insured by the FDIC. The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category.
High-yield bank accounts: These accounts offer a good place to keep money that you'll need moderate access to, like paying your major bills each month. There may be some restrictions on how many checks you can write during a time period and service may be no-frills. With interest rates much better than standard bank accounts and FDIC insurance, these are much better vehicles for your cash. Check out online banks that can better cut costs in order to offer the best rates.
Money market deposit accounts: These bank accounts require a minimum balance and allow only a limited amount of transactions per month, penalties may be imposed if you exceed. However, your money is insured by the FDIC, remains very liquid and can be pulled out quickly and painlessly if needed. Because of easy access to your money, you'll be offered a lower interest rate than a CD or similar investments.
Money market funds: Money market funds invest in liquid and safe securities such as CDs, government securities and "commercial paper." These accounts are easy to pull money out of and offer better returns that money market accounts; however, the down side is that because they are owned by brokerages and fund families, they are not insured by the FDIC. Also, there are no guarantees on the price of each share in the fund; so technically, you could lose money in a volatile environment.
Certificates of deposit (CDs): These debt instruments hold your money for a contracted period of time, from three months through five years. Interest rates correlate positively to the length of time a CD is held; the longer to maturity, the more your rate. CDs offered by banks are insured by the FDIC, but those offered by funds are not. If you have to cash out your CD before it matures, you'll have to pay a penalty.
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