Where To Put Your Cash :
From The Motley Fool
http://www.fool.com/savings/shortterm/03.htm
By Robert Brokamp (TMF Bro)
There are so many places to stash your short-term savings. Here we present the résumés of the major aspirants:
Checking Accounts
Checking accounts are meant for transactions, not savings. That's why many don't pay much, if any, interest. However, some banks do combine the conveniences of checking with the return of a money market account. Also, as "asset management" accounts at brokerages become more feature-rich -- offering unlimited check writing, ATM access, and money market rates -- more folks are shunning the banks in favor of brokers.
Pros
* Your money is only a check or ATM machine away.
* A bank branch is usually not far, often in your grocery store, if you're so old-fashioned as to want to deal with a human being.
* As with all bank deposits, checking accounts are FDIC insured.
Cons
* Depending on the bank, you may not earn much, if anything, on the money in your account.
* Many checking accounts require a minimum balance, and/or charge fees that are a pox upon your pecuniary patience.
Savings Accounts
In the old days, savings accounts -- or passbook accounts, as they're sometimes known -- were the most popular rest area for short-term savings. Fortunately, folks are getting smarter and parking their pelf in higher-yielding investments. The 1-2% you earn in a savings account isn't enough to even keep up with inflation.
Pros
* The money in a savings account is FDIC insured.
* Account minimums are often low.
Cons
* The return on savings accounts are so low, some mattresses pay more in interest. (Not really, but what happens on mattresses is more interesting.)
Money Market Deposit Accounts
Money market deposit accounts are offered by banks, usually require a minimum balance, and permit a limited number of transactions (six transfers, three of which can be checks written on the account).
Pros
* Money market deposit accounts are very liquid. Most allow for easy access through checks, transfers, and even ATMs.
* Since they are offered by banks, money market accounts are FDIC insured.
Cons
* Unfortunately, you may pay for the liquidity by receiving less in return than from certificates of deposit.
* If your account falls below the minimum required balance, or you exceed the limited number of transactions, you might pay a penalty.
Money Market Funds
Money market funds are offered by brokerages and mutual fund families. These funds invest in highly liquid, safe securities such as certificates of deposit, government securities, and commercial paper (i.e., short-term obligations issued by corporations).
Pros
* With a money market fund, you can have the money in your hot little hands very quickly. Often, you can write checks or use an ATM card.
* The returns on money market funds are typically higher than the return on money market accounts.
* Issuers go to great lengths to keep the NAV (the price of each share of the fund) at $1, so your principal is relatively safe.
Cons
* Money market funds are not FDIC insured.
* There is no guarantee that the NAV will remain at $1.
Certificates of Deposit (CDs)
CDs are debt instruments with a specific maturity, which can be anywhere from three months to 60 months (i.e., five years). Most CDs are issued by banks, but they can be bought through brokerages.
Pros
* CDs are very safe since most are offered by banks and are thus FDIC insured.
* Depending on the length to maturity, CDs may pay more than money markets.
Cons
* Your money is off-limits until the CD matures. If you must, you can redeem the CD early, but you'll pay a penalty.
U.S. government bills or notes
"Treasuries" are backed by the full faith and credit of the U.S. government. Treasury bills mature in less than a year; Treasury notes mature between two and 10 years.
Pros
* Treasuries are considered the safest investments in the world.
* They can be bought directly, commission-free, at TreasuryDirect.
* They are exempt from state and local taxes.
Cons
* If you shop around, you might get a better return from money markets, CDs, and corporate bonds.
* If you need your money before the security matures, you may not get back all of your original investment.
