Once you've built up some cash for a short term savings goal, you'll need a place to store it until you're ready to use it. Maybe you've been saving for an upcoming family vacation, a down payment for a house, a new car, or just like to have access to money in the event of emergencies. Whatever your reason for saving the cash, it can be very disappointing to stash it someplace where it won't earn any interest. Here are things you should consider when saving your money for short term goals to gain the most financial benefit from those savings:
How Accessible is the Cash? If your putting an emergency fund into some form of savings, you want to be able to access the money instantly and as often as necessary without fees. On the other hand, if the money is to be used for a purchase or event taking place at some point in the future, you may not want the temptation of having an ATM connected to the funds. Think about what the funds are there for, and choose a savings option based on how accessible you want the money to be.
What is the Interest Rate? If you have a sizable amount of money to save, you should look for the highest possible interest rate even if the money will only be in the account for a short period of time. Not all interest rates are tied to the length of time you save the money – some are offered based on how much money is saved. Look for these options to get the best rate.
What are the Withdrawal Penalties? Even if your plan for the money doesn't involve that cash being used for another two or three years – circumstances change and you never know if something will happen and you end up needing the money earlier. Before putting your money into any investment or savings option, you should always consider how much of a penalty you will pay if you do have to withdraw the money earlier than expected. Is the risk of having to pay that penalty worth the higher interest rate you may receive from selecting that savings option?
Once you've considered the answers to these questions, you can begin selecting from your savings options. You have a number of options available to you for short term savings, including (but not limited to) interest-earning checking accounts, traditional savings accounts, online savings accounts, certificates of deposit, money market funds and money market deposit accounts.
Interest-Earning Checking Accounts: although these accounts earn interest, they are rarely your best choice for saving money even for a short term period. The interest rates offered by checking accounts are almost always lower than your other options and the only benefit they offer is the ability to access the money via ATM or check any time, and without penalty, as they are designed for multiple transactions.
Traditional Savings Accounts: your local bank likely has a passbook savings account that earns a small amount of interest. You can easily deposit money and withdraw money by visiting your bank branch, or sometimes with an ATM card. There are no fees to deposit or withdraw and no set limit that you have to save the money for. The money is FDIC insured (provided you choose an FDIC insured banking institution) but the amount of interest the account earns will be negligible in most cases.
Online Savings Accounts: because a bank that operates entirely online has lower overhead costs of operations, they can offer higher interest rates to their customers. Many times an online savings account gives you an interest rate based on the amount of money you are saving, which can increase depending on the size of your balance. Access to the money is quick and easy if you decide to obtain an ATM card with the account; or you can make it slightly more difficult to get your money by only linking the account to your local bank. A linked account will require that you transfer the money from one account to the other, which can take a few days depending on your bank's policies but there are no fees for doing so.
Money Market Funds: similar to the stock market, you will not be guaranteed to walk away from money market fund investments with the same amount of money you put in. This is not always a good option for short term savings, especially if you aren't willing to watch market fluctuations eat some of your hard-earned money from time to time! For short term savings that can face market fluctuations though, and for people who have knowledge of the market, you could have a great experience with this type of investment.
Money Market Deposit Accounts: provided you don't plan to go over the limited allowed transactions per month (you can write between 3 and 6 checks per month from a money market account), a money market deposit account offers a good interest rate and is FDIC insured the same way a traditional savings account is. You can withdraw the money without penalty by transferring it to your bank account, or by writing a check, as mentioned – just as long as you don't plan to write more than the maximum allowed to checks per month.