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Where to Park Your Cash in Short Term Instruments

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There are many options for parking your cash in short term instruments. When making a choice, consider your financial requirements. Are you looking for daily liquidity? Is earning interest important to you? Do you need to be near an ATM machine or bank branch? Is FDIC insurance important, or not? Your goals for the money will direct you to the most appropriate short term instrument.

Checking Accounts

Bank checking accounts let you make many easy, everyday transactions and they provide a record of these transactions. But many bank checking accounts pay little or no interest. If you bank with a local institution, you should have convenient branch and ATM access. Your money is FDIC insured. There may be minimum balance requirements and various fees.

Brokerage Asset Management Accounts

Brokerage asset management accounts (also known as central assets accounts or sweep accounts) mimic the traditional checking account in some ways, with no limits on check writing and ATM access. Often these pay better rates than a bank checking account. An example of such an account is the Cash Management Account by Merrill Lynch.

Bank Savings Accounts

The traditional bank savings account may offer few benefits and pay a very low interest rate. However, you have the convenience of dealing with a local bank. Your money is insured by the FDIC. If you have a small amount to get started saving with, minimum balances are often low on these accounts.

High Yield Bank Accounts

High yield bank accounts are available at brick and mortar banks and online banks. Online banks often pay relatively higher interest rates since they have little overhead and may offer fewer extra services. High yield bank accounts may offer you liquidity and the flexibility of depositing or withdrawing at any time. These accounts are FDIC insured. However, the low frills accounts in this category may have limited ATM or debit card access, and limited check writing privileges. This can slow liquidity if you need to get your hands on funds. With a high yield online bank account, funds transfers may need to be linked and coordinated with another account. The transfers may tie your money up for a few business days.

Money Market Deposit Accounts

Money market deposit accounts are offered by banks. They are insured by the FDIC, usually require a minimum balance, and may have restrictions on the number of transactions per month. They also pay better interest than the standard bank savings account, and offer liquidity through check writing, funds transfers, and ATM access. Penalties may apply if you exceed a transaction limit or drop below the minimum balance.

Money Market Funds

A product of brokerages and mutual fund families, money market funds consist of liquid, low risk securities including certificates of deposit and government securities. These are not insured by the FDIC, but usually pay better returns than money market accounts. Check writing privileges and ATM privileges apply. The price of each share in a money market fund is called the NAV which means “net asset value”. Managers of these funds strive to keep the value of the NAV at $1 per share. This short term vehicle for your savings is relatively safe, but there is no guarantee that the NAV will never fall below $1.

Certificates of Deposit

Certificates of Deposit (CDs) can be opened through banks or brokerages. These are debt instruments with a maturity period ranging from three months to five years. Bank CDs are FDIC insured, and CDs may pay higher returns than money market accounts. Longer maturity periods usually mean higher rates, but they also mean less liquidity. Penalties apply if you withdraw the money prior to maturity.

Treasury Bills and Notes

Treasury bills and notes are generally very safe investments that are backed by the creditworthiness of the U.S. government. Tax free at the state and local levels, treasury bills have relatively short maturity periods (less than one year). Notes reach maturity at two to ten years. However, these maturity times may not provide enough liquidity for some investors.

I Bonds

This type of U.S. Savings Bond offers returns that are adjusted on a semiannual basis to keep abreast of inflation. They can be purchased for as little as $50, but you will tie up your money for at least a year, and lose some interest if you redeem before five years.

Additional Resources

·         For information on U.S. Savings Bonds: http://www.savingsbonds.gov/
·         For information on Treasury Bills and Notes: http://www.treasurydirect.gov/indiv/products/products.htm
·         For information on current money market account rates: http://www.bankrate.com

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