Short-term Savings: Where To Park Them
Short-term savings refer to the savings that will be used in one year or less. It could be to purchase big ticket items or fund an unexpected purchase. A good example is replacing your heating system in the winter, since your existing one broke down. In short-term savings liquidity gets priority over interest earned.
Let’s take a look at some of the short-term saving instruments that are available.
The easiest place to save money is in a saving account in a bank, a credit union or co-operative. Liquidity in a savings account is high, while interest rates they attract are quite low.
U.S saving bonds by the U.S Treasury give the principal amount with interest on redemption. The benefit of bonds are that they earn market based rates. They are risk free and highly liquid. They earn better rates of interest than savings accounts. No penalties for redeeming in a shorter time but longer redemption periods have better interest rewards.
Money Market Accounts:
These accounts are given by banks rather than the government. Money market mutual funds earn from various saving instruments. Banks, brokers and mutual funds offer them.
Corporate Bonds by companies like Government bonds can be redeemed at any time. Companies that have a good reputation offer good rates of interest and have low volatility. Most of these bonds can be redeemed at any point through a broker.
T-bills or Treasury Bills:
T-bills can be availed in the short-term for 13-, 26-, and 52-week; medium-term notes (2-10 years), and long-term bonds (over 10 years) can also be availed. They have low risk and high liquidity. They do not earn as much as a corporate bill but people invest in them for their guaranteed returns.
Online Piggy Banks:
Software releases like Virtual Piggy help parents save small amounts and monitor how much children spend online. This system puts credit cards out of the picture. Another player is smartypig.com. Specific financial goals are set, as are automated transfers to the online piggy bank account. It allows for family members (siblings, grandparents) and friends to contribute, if they would like in achieving this goal. These online piggy banks give deals by tying up with retailers. Interest rates are usually higher than banks and are FDIC approved.
Saving for short term goals work on a save now, gratification later rather than an instant gratification saddled with debt approach. It helps in the purchase of items with cash saved rather than borrowed monies. It is in fact a financial cultural shift with benefits and more benefits.