If you’ve worked hard to save enough to build a bit of saving for an emergency fund or perhaps a college year for a child, it doesn’t make sense to park your hard-won prize in a simple checking account or passbook savings account. While funds in either kind of savings vehicle are protected by the FDIC, they pay little interest.
According to Bank Fort Collins, CO, while you do want to put your money somewhere that it’s safe, you need to remember that if you don’t get enough interest, you actually lose your principal to inflation that erodes its value at about bout 2% each year (although the year 2015 has been an exception, with inflation at well under half a percentage point). You also don’t want to have to lose liquidity — short-term funds are for quick retrieval, after all.
If you’re short of ideas for your short-term funds, here are suggestions that can help you begin thinking in the right direction.
A high-yield bank account
Some online-only banks offer checking and savings accounts with interest rates that rival those of CDs. You get FDIC insurance protection for your money, and you get access to your cash anytime you want. The only difficulty with such accounts is that you don’t get access to your money through an ATM card or a checkbook, which means that it can take up to two days to get at your money out in the event of an emergency. You’ll need to transfer money from the high-yield account to a regular account through your Internet account access.
A money market fund
Money market bank accounts are insured by the FDIC. Money market funds, which are accounts run by brokerage houses, on the other hand, are not. When you invest in these funds, you put your money in safe and liquid government securities or short-term corporate obligations, earning far more than any money market account would make. While you do get an ATM card and check writing facilities, you don’t get FDIC insurance.
Notes or bills issued by the US government are backed by the government’s credibility, which makes them the safest investments on earth. You can buy treasury notes for as little as a year to ones that you hold as long as 10 years. They pay better interest rates than most corporate bonds or CDs; better still, whatever interest you earn is considered tax-free. It’s important to remember, though, that if you need to tap your investment before it matures, you will lose money to early-withdrawal penalties.
Inflation-indexed savings bonds
Also called I Bonds, these are issued by the US government, and promise at least enough return to keep your money from losing value to inflation. Since they are US government issued, they are safe, and earnings are tax-free in certain cases, such as when you use it for educational purposes. Other purposes are taxed, even if those taxes can be deferred for as long as 30 years. I Bonds need to be held for at least 12 months.
Security is paramount when you invest in short-term funds; you have no time to recover, should your investment not perform well. As long as you do have security and liquidity, you can go with practically any option that you come across. A little interest doesn’t hurt, though.