While long term investments are more rewarding, there are times when we put money away for short periods, so they can be withdrawn for emergencies and for anticipated future expenses (an addition to the family, kids starting college, planning a vacation). Sometimes, you may just want to store money to wait for good investment opportunities. Risk, return and liquidity are among the important criteria to check when deciding the vehicle for such temporary savings. This obviously removes stocks as a short investment option. There are many other choices available and we’ve outlined some for your information:
Savings accounts- These tend to be safe and simplistic in procedure but you are taxed for such security. It’s difficult to expect high returns no matter how hard you look to select a bank offering high interest. For those to whom safety is a real concern, savings account work. They can be used concurrently with checking accounts for managing personal finances. The account will have to be opened with a specific amount of money and there a minimum balance has to be maintained.
Checking accounts – These basically exist for the convenience of withdraw and deposit and see much more action than savings accounts. In fact, these are called as ‘current accounts’ in some parts of the world, because they are used for near-term transactions. The interest is low or non-existent because of such activity, but having an account makes it so easy to write and deposit checks, withdraw money from automatic teller machines (ATMs) and arrange for automatic transactions, such as paying utility bills. Usually, no opening fees and minimum balances are required but there may be exceptions, so check around before buying. There is really no point in incurring such expenses if your transactions are very frequent.
Money market accounts- Here, the services are similar to checking accounts but there is less accessibility. There is a limit on the level of transactions and the interest is rather low too. Banks and brokerages control money markets and provide a vehicle to store money that will be used for future investment opportunities or that has been earned from previous investments. Again, this type of account is for the ‘safety-conscious’ and is not considered a worthwhile investment by others.
Money market funds- These are liquid investments and offer high returns, when compared to the above options. Usually managed by brokerages, these carry money that is not invested at the time. Although deposits are not insured by the FDIC (Federal Deposit Insurance Corporation) the risk is negligible.
Certificates of Deposit- The returns are high for this carrier there is a maturity period involved. Withdrawing money before this stipulated time can result in a penalty. These are very high on security; most CDs are insured by the FDIC.
Treasury securities- These are a type of bonds and give you mid-range returns and high liquidity.