If you have a sum of money which you are saving up for a major upcoming purchase such as a house, you will want to look for the best short terms savings options so that you can make some cash on your savings while you are gearing up for your purchase. Some factors to consider while picking short term savings options are as follows:
Ease of access: How easy will it be to access these funds when you need them? This is especially important if you will need to be withdrawing cash frequently. Will your short term savings option offer ready access through checks, ATM withdrawals, online transfers and so on?
Interest rates: What kind of interest will your savings pay in the short term? Also, pay close attention to the fine print here â€“ the best savings interest rates may only be available if your savings exceed a certain threshold. Will your savings qualify for the highest interest rate?
Level of service: Will you get customer service from a live person? Typically online savings accounts will not provide much or any personalized customer service, so this could be a consideration if you feel you need this type of service.
Penalties: Are there penalties associated with early withdrawal, exceeding a certain number of transactions within a given time period, letting your balance fall below a threshold, or anything else? If so, how severe are these penalties?
With these basic considerations in mind, you can start exploring what are the best short term savings options for you.
Best short term savings options
Checking accounts : These are the most basic options for ready cash flow. Strictly speaking, they are not meant for savings at all, but some do pay a modest interest rate. However, some banks do combine features of checking accounts with money market accounts, giving you relatively high interest rates. More and more brokerages are also offering asset management accounts that combine checking account features like unlimited checking, and ATM facilities with money market interest rates, meaning that these accounts could be preferable over traditional checking accounts offered by banks. Pros of checking accounts include ease of access to your money through bank branches, checks and ATMs, and that your deposits are FDIC insured. Cons include a relatively low rate of interest, and possible fees, including withdrawal charges, as well as minimum balance requirements.
Savings accounts : Savings accounts are starting to seem a little old fashioned for short term savings these days. Even the best savings account interests rates rarely keep up with the pace of inflation, and so nowadays a lot of people prefer to put their savings in high yielding investments. Pros include FDIC-insured deposits, and usually low minimum balances required. Cons include very low interest rates, barely more than some savings accounts.
High yielding bank accounts : These are usually online accounts that offer relatively high interest rates, sometimes comparable with CD savings rates. You can transfer funds to and from them at any time, and funds are liquid. High-yield accounts are also FDIC insured. Cons include the lack of ATM or check privileges, and you have to do your transactions online, linking your high yield online account to another account at a brick-and-mortar bank through which you perform your transfers. Transactions can also take two to five business days to go through, so these are not great for immediate cash access. Also, high interest online accounts often offer high interest rates as teasers, which can go down with time. So you need to look into their interest rate history before deciding to enroll.
Money market deposit accounts: These are offered by banks. They generally allow limited transactions every month, and you need a minimum balance. They are liquid and easy to access, generally allowing check-writing, transfers and ATM withdrawals. Money market deposit accounts are also FDIC-insured. However, their returns are usually less than CD savings rates, and there are penalties associated with falling below the minimum balance or exceeding the number of free transactions.
These are but some of the best short term savings options available to you. More in my next article, where I will cover money market funds, certificates of deposit, treasury bills and bonds.