About the Talk
November 25, 2016 12:00 PM
If you have money you want to put in a financial institution for a while then you must choose the right bank that will satisfy your own best interest and don't just pick the one knocking in front of your door.
The best short term savings account for you is the one that will satisfy your needs on the following areas:
How often will you access your account? And how would you want to access it?
Does the institution offers the highest possible rate for your money? If not, look for other financial institutions that can give a better deal.
How would you want their service? Do you like a personalized service or you are more of a Do-It-Yourself client?
If certain circumstances arise and you want to change your plans, how bad their penalties are if you’re planning to get you money back as sooner as possible?
Let's have an overview of some short term savings you might want to consider.
Back in the days, savings account (also called passbook account) was the most popular choice for short term savings. Although savings account offers low minimum deposit and insured by FDIC, the return rate here is very low.
Unlike savings account, checking accounts are designed for withdrawals and deposits but typically do not earn interest. The convenience on having a checking account is that you can access your money with the use of an ATM or check anytime and anywhere as well as transferring to or from other accounts. It is also 100% covered by the Federal Deposit Insurance Corporation (FDIC) which means, depositors can still get their hands on their money when they need it, especially in times of financial turbulence. Just don't expect a high return value on your deposits, if there's any, it surely is very minimal and many checking accounts demands for fees and minimum balances under the account.
HIGH YIELD BANK ACCOUNTS
Today, there are many financial institutions which offer significantly high-yield savings and checking accounts. In here, you can withdraw and deposit any time without waiting for a time period to withdraw and it offers better rates than the traditional savings and checking accounts with the same FDIC insurance.
The caveats in this type of savings are that bare bone banks have no ATM/debit access or checkwriting permissions which can be a problem if you need to generate cash immediately. In addition, you have to consider the introductory rates offered because these alluring rates are usually temporary.
MONEY MARKET DEPOSIT ACCOUNTS
This type demands a minimum balance deposit and with a limited number of transactions per month only. There's an easy access to your money through ATM's, checks and cash transfers here too and just like any other type of bank accounts, money market deposit accounts are also insured by FDIC. However, due to the conveniences it offers, the return rates are low (compared to CD) and penalties are present if you don't follow the minimum balance required or exceeded the limited number of transactions.
MONEY MARKET FUNDS
Money market funds are offered by brokerage firms and mutual funds institutions. These funds comprised of high liquidity and safe securities. It is also easy to access your money in this type of investment with a higher return rate compared to money market deposit accounts. However, money market funds are not covered by FDIC and the net asset value of the share price may go higher than $1.
CERTIFICATES OF DEPOSITS (CDs)
Debt instruments like CDs have specified maturity of 3 months to 5 years. Aside from banks, CDs can also be issued by brokerage firms. Certificate of deposits (CDs) is FDIC insured with high return rates than money markets depending on the maturity period set. The maturity date is fixed which means that you cannot get your hands on your money not until the maturity expires. You will have to pay a penalty if you want to get you money sooner than the maturity date.
US GOVERNMENT BILLS OR NOTES
These are offered by US governments and considered as the safest investment today, however, you can't get high returns here compared to money markets and CDs. Moreover, your original investment cannot be redeemed if you decided on not continuing the deal before the maturity ends. Treasury bills have maturity expiration of less than a year while treasury notes are fixed between 2 and 10 years. As this is offered by US governments, these types of investment are exempted from state and local taxes. You can buy one of these securities directly at the TreasuryDirect free of commission.
These savings bonds are offered by the U.S. Department of the Treasury and are endorsed by the US government which yields inflation-adjusted semiannual returns. This can be considered as one of the safest bonds as it is backed up by the US government and protects you from inflation. One advantage of these bonds is that they are available in affordable denominations (from $50 to $10,000) and are exempt from local and state taxes. The only drawback here is that I Bonds are subject to a 3-month interest penalty if you decided to claim it within less than 5 years of issue date.
Municipal bonds are also called “munis”. It is as safe as US Securities and exempted from federal, local and state taxes especially if you reside in the town that issued the bond. These debt securities are offered for the purpose of financing capital projects such as building schools, highways and other public infrastructure projects. Even though “munis” have lower interest rates, high-income investors seek this kind of investment because of its tax-friendly returns. And like some other type of investments listed above, if you decided to redeem your money before the maturity date, redeeming your original invested amount wouldn’t be possible.
These are debt security issued by firms and corporation to finance various future operations. Compared to government securities, CD’s and money markets, corporate bonds often give higher returns however, the corporate bonds could suspend interest payments. If you plan on redeeming your bond before the maturity date, then you might not collect all the invested money you put. Moreover, commission fees are used to buy these bonds.
Bond funds are an accumulated fund from different investors and used to purchase various kinds of bonds. It is an excellent way to purchase bonds in affordable denominations and get the diversification while lessening the risk of choosing a bond from a bum company.