If you are holding on to some amount of money now and you want to stash it away somewhere, you might be led to choose the nearest or the most available financial institution already knocking on your door. Do remember that it is not about them but about you, the owner.
Deciding on the best kind of short-term savings account requires satisfying your own best interests and needs in such areas as the following:
Accessibility: Which do you prefer to use to access your account – check, ATM, online and others? How frequently do you expect to use it??
Interest Rate: Is the interest rate your bank or institution giving the highest you can get? If not, scout around for a better deal, if you can.
Quality of Service: Do you demand personalized service or are you more comfortable doing things yourself or do you prefer some minimal customer assistance?
Penalties: In case you have a change of mind and want your money back sooner, what penalties will you incur?
It will help us assess the candidates now:
Generally, checking accounts best serve business transactions, not just personal savings. Most checking accounts, therefore, do not pay interests although there are banks who bundle the facilities of checking with money-market account earnings. Likewise, "asset management" accounts provided by brokerages which contain several attractive features, such as limitless check-writing, use of ATM access, and high money market interests, making brokerages more appealing to people with time
You can access your money readily with a check or an ATM.
Also, if you long for the traditional personalized bank services of a teller, your bank is just around the next street corner.
Federal Deposit Insurance insures checking accounts like they do every bank account.
Your bank may not offer any return on your deposit; or if it does, it might be very minimal as to matter.
As most of us know, checking accounts may require a minimum retaining deposit or bank services charges --- maybe both, which could make you think twice before getting one.
Formerly, savings accounts (also referred to as passbook accounts) were the most common places to keep money for a short duration. However, people are learning to stash away their treasures in investment instruments that offer greater returns. Today, savings accounts have practically shrunk in their ability to make money for you, if you have not noticed yet.
FDIC insures your savings account to a certain amount.
You can open an account with a minimal starting deposit.
You get almost nothing for parking your money with a bank – a parking meter makes a lot more money just standing there.
Bank accounts with high returns
Today, savings and checking accounts can provide high returns, making them great money storage to cover your essential expenses. Flexible and liquid, these accounts allow you to put in or take out conveniently and any time you want to. There are some which offer interest rates equal with more exclusive investments, such as CDs. You can gain extra mileage on your money if you apply for an online-only bank which saves on costs by having fewer features than those offered by other accounts.
Higher returns compared to conventional bank accounts.
FDIC insures high-yield accounts at par with other accounts.
Online banking can constrain you access to your money without the conveniences of checks and ATM cards.
Clients need to arrange their expenses by moving money to and from the online bank to a linked checking/savings or brokerage account. If you cannot wait for the usual delays – up to almost a week at times – for transactions to clear, then this may not be for you.
Beware of limited-time promo rates by investigating the provider’s six-month interest rate stats.
Money-market deposit accounts
Banks also provide money-market deposit accounts which often demand a minimum deposit balance, and allow a certain number of monthly transactions (six transfers, which include three checks issued on the account).
Money-market deposit accounts can be easily accessed using checks, ATM cards and cash transfers.
FDIC insures money-market accounts like all bank accounts.
Because of the conveniences, you get lower returns compared to certificates of deposit.
You can be charged with penalty fees for going below your minimum balance or when you make more than the allowed number of transactions.
Mutual families and brokerages provide money-market funds which are funds invested in highly-liquid, safe securities, e.g., certificates of deposit, commercial paper (short-term obligations offered by companies) and government securities.
Money-market funds can be accessed readily using checks or ATM cards – a boon for the eager beaver.
Money-market funds often higher returns than money-market accounts.
Issuers of these funds work overtime to maintain the NAV (the funds’ unit price) at $1, making your principal rather secure.
FDIC, unfortunately, does not insure money-market funds.
The NAV limit may go higher than $1.
Certificates of deposit (CDs)
Debt instruments, such as CDs, have a prescribed maturity, between 3 months to 5 years. Banks usually issue CDs although brokerages also offer them.
CDs are quite secure because they are FDIC-insured.
CDs can provide higher yields than money markets, especially if they have longer maturity periods.
You will have to wait for the CD to mature before you can get hold of it. Nevertheless, you can withdraw it earlier but with a penalty charge.
U.S. government notes or bills
Also called "treasuries", these notes or bills are fully secured by the trust and credit of the U.S. government.
Treasury bills take less than one year to mature; while treasury notes take 2 to ten years to fully mature.
These are considered the safest investments in almost all countries.
You can buy these directly and commission-free, at TreasuryDirect.
They are also exempt from local and state taxes.
In terms of yield, you might be able to find higher returns from CDs, money markets and corporate bonds.
Withdrawing your money before maturity may cost you some losses on your original investment.
I Bonds are inflation-indexed savings bonds offered by the U.S. government which yield inflation-adjusted semiannual returns, thus, protecting your money’s buying power.
The US government also fully guarantees I Bonds.
You are protected against inflation -- a capital personal “I” for any investor.
Many will be happy to know that these bonds are available in affordable denominations, as low as $50 and as high as $10,000.
You can acquire them from any reputable financial institution, as well as at TreasuryDirect.
Your returns are tax-exempt, locally and state-wide, and can also be tax-free if applied for post-secondary education purposes.
Moreover, taxes on your earnings can be deferred for as long as 30 years.
The minimum holding period for an I Bond is one year 12 months, and if you redeem it within less than 5 years, you have to pay a penalty equivalent to your three months' earnings.
Also called "munis" by the big players, municipal bonds are offered by local and state governments for the purpose of constructing schools and other public infrastructure projects. Munis appeal mostly to high-income investors seeking tax-friendly returns.
Munis are almost as secure as U.S. securities.
Munis are exempt from federal taxes, and, perhaps, also local and state taxes, especially if you reside in the town government that issued the bond (look into the tax advantages before buying).
Munis offer comparatively lower Interest rates. If you belong to a high tax category, you can get better returns from other investment options.
You must shell out a commission to purchase munis.
Like some other investments, you cannot get all your money if redeem it before the maturity date.
Corporate bonds are debt bonds offered by firms, ranging from the high-yielding blue chips to the less-productive "cow chips". The higher the creditworthiness of the issuing company, the lower interest it pays. Moody's and Standard & Poor's classify firms that issue these bonds according to their ability to pay out their debts. Remember that only short-term bonds are suitable for short-term savings.
Corporate bonds often give higher returns compared to money markets, government securities and CDs.
The issuing firm may end up defaulting on interest payments or even totally fold up.
Commission fees are charged to buy these bonds.
In case you have to withdraw your money, you will not get back your original invested amount.
Bond funds are mutual funds that put together investors’ money to purchase bonds of all kinds.
These provide an attractive means to buy bonds in affordable denominations while providing the diversification to reduce the risks of picking out dud bonds from sluggard companies.
The NAV or the share price of a bond mutual fund varies, as interest rates of the bonds bought and sold within the fund fluctuate. As a result, it is uncertain whether you can recover your original investment when you need to. Moreover, returns on a mutual fund can fluctuate.
Owning the fund requires you to pay an ongoing expense called the "expense ratio" as well as a commission fee or "load".
Reference: Robert Brokamp article on the same topic.