Short-term Saving Options There are so many places to place your short-term savings. Here we present all the options that are available to you.

Checking Accounts
Checking accounts are meant for transactions, not savings. That is why many do not 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 away, often in your grocery store, that is if you do not want to mange your account on the web. 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 just eat away at your money.

Savings Accounts
In the old days, savings accounts -- or passbook accounts, as they are sometimes known -- were the most popular rest area for short-term savings. Fortunately, folks are getting smarter and parking their money in higher-yielding investments. The 1-2% you earn in a savings account is not 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 are very low.

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 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 will pay a penalty.

U.S. government bills or notes
"Treasuries" are backed by the full faith and credit of the US 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.

I Bonds
I Bonds are inflation-indexed savings bonds issued by the US government. The amount an I Bond pays is adjusted semiannually so as to keep up with inflation and protect the purchasing power of your money.

Pros

I Bonds are backed by the full faith and credit of the US government. The "I" in I Bond protects your investment against inflation risk. They are sold in manageable denominations, ranging from $50 to $10,000. They can be bought from most financial institutions, including TreasuryDirect. The earnings are exempt from state and local taxes, and can be tax-free if used for post-secondary education expenses. Taxes on earnings can be deferred for up to 30 years. The yield is reasonable. I Bonds issued between May and October 2001 will pay 5.92% for six months (at which point the earnings rate will be adjusted to account for inflation).

Cons

You must hold an I Bond for at least six months, and you will pay a penalty of three months' earnings if you redeem the bond before owning it for five years.

Municipal bonds
Municipal bonds (or "munis," as the big talkers refer to them) are issued by state and local governments in order to build schools, highways, and other projects for the public good. Municipal bonds are most attractive to high-income investors looking for tax-friendly income.

Pros

Munis are just a step down from US securities in terms of safety. Income is exempt from federal taxes, and might be exempt from state and local taxes if you live in the municipality that issued the bond (check on the tax implications beforehand).

Cons

Interest from munis is relatively low. Unless you are in a high tax bracket, you will get a better return from other investments. You may have to pay a commission to buy municipal bonds. If you need your money before the bond matures, you may not get back all of your original investment.

Corporate bonds
Corporate bonds represent debt issued by companies, from the blue chips to the "cow chips," if you know what we mean. The more creditworthy the company, the less it'll pay in interest. Moody's and Standard & Poor's rate companies as to their ability to meet their debt obligations. Only short-term bonds are appropriate for short-term savings.

Pros

Corporate bonds usually pay more than government securities, money markets, and CDs.

Cons

The company that issued the bond could suspend interest payments, or even go belly-up. You may have to pay a commission to buy bonds. (See our Brokers/Online Trading section to learn how to select the right broker for you.) If you need your money before the bond matures, you may not get back all of your original investment.

Bond funds
Bond funds are mutual funds that pool the money of investors to buy bonds of all stripes.

Pros

They are an efficient way to buy bonds in small increments and get the diversification that minimizes the risk that you picked a bond from a deadbeat company.

Cons

The NAV (i.e., the share price) of a bond mutual fund fluctuates, due to interest rate movements and the bonds bought and sold inside the fund. Therefore, you are not sure exactly how much of your original investment will be around when it is time to take your dough. Likewise, the yield on a mutual fund fluctuates. You will pay an ongoing expense to own the fund, called the "expense ratio," and you may have to pay a commission, called a "load." (See our Brokers/Online Trading section to learn how to select the right broker for you.)