Most everyone will agree that EVERYONE needs some type of short-term or emergency savings. There are a lot of unfortunate things that can happen to consumers that can have devastating repercussions such as emergencies and loss of income. With all of the uncertainty in the economy right now, there has never been a better time to look into some of the different types of accounts and the pros and cons of these accounts. By comparing the different types of savings, it will help to ensure that you are getting the maximum benefit from the money you currently have or plan on investing in a short-term or emergency savings account. For short-term or emergency savings, a checking account, savings account, money market account or certificates of deposit (CD's), would be the best place to invest your money. Unfortunately, although we are firm believers in investing your long-term money in the stock market, we feel that the markets are way to risky for short-term savings and any money that you will need within the next 3 to 5 years should never be at risk in the stock market. Ultimately it is your call as to how much you have set aside in a short-term or emergency savings account. Most people agree that you should have a minimum of 3 to 6 months worth of living expenses set aside and even more if you have a family. Checking Account -- Checking accounts are really designed for the consumer to do day to day transactions. Most checking accounts pay very little or even no interest on balances. This is because most consumers have turned to the 'Free Checking' programs which offers more features such as unlimited check writing, online account access and banking, as well as ATM and debit card access.
Pros - The deposits made into a checking account are FDIC insured.
- Easy access to your money by checks and ATM machines.
- Most checking accounts have access to a check card, which is like a plastic check that gives the consumer convenience and more security when making transactions.
Cons- Most checking accounts earn very little or even no interest on the money in your account.
- Some checking accounts require you to maintain a minimum balance. You may be charged a monthly service fee if your balance goes below the minimum balance.
- A lot of merchants do not accept checks anymore because of the high rate of insufficient funds.
Recommended Checking Account Companies: WaMu Free Checking™ , Bank of Internet Checking Accounts
Savings Account -- Savings accounts used to be one of the most popular accounts for any type of savings. Interest rates were always a little better than you might receive with a checking account. You still had access to your money and the higher your balance was, the better your interest rate would be. With the National Average on Regular Savings only being around .5% - 1%, many consumers have turned to money market accounts that can earn an APY* of 5% or higher.
Pros- The amount of money needed to open a savings account can be as low as $5.
- The deposits made into a savings account are FDIC insured.
Cons- Most regular savings accounts earn very little interest, even with large balances when compared to other short-term saving accounts.
Recommended Online Savings Account Companies: HSBC Direct Online Savings , WTDirect Savings Account
Money Market Account -- Money market accounts are a FDIC-insured savings account that offers the account holder a higher rate of return than the traditional savings account, but restricts the number of withdrawals that can be made every month.
Pros- Most money market accounts allow for easy access through online transfers, checks and even ATM's.
- Money market accounts are very liquid.
- Money market accounts are FDIC insured.
Cons- Some money market accounts have a minimum required balance. Failing to keep the minimum balance may result in a lower APY* and/or fees and service charges on the account.
- Withdrawals by online transfer and check are limited to a combined six per calendar month, three of which may be by check.
- Daily ATM withdrawals limits. (Usually $100-$500 a day)
Recommended Money Market Account Companies: WTDirect Savings Account, HSBC Direct Online Savings
Certificate of Deposits (CDs) -- A Certificate of Deposit (CD) is a savings certificate that entitles the holder to receive interest. CDs tend to offer higher interest rates than savings accounts because the holder of the CD commits the deposit to a fixed interest rate for a set term. CDs have a maturity date and once a CD matures the certificate holder will have the option to withdrawal the funds or reinvest the CD for the same term at the then current rate for that term. Banks offer various options regarding the length of time you can place your money in a CD, but typically CDs mature in 3 months to 5 years.
Pros- Depending of length of maturity, CDs can earn more in interest than money market options.
- Certificate of Deposits (CDs) are FDIC insured when issued through the bank.
Cons- Unless you want to pay an early withdrawal penalty, the money you have invested in a CD is off limits until the CD matures.
- CDs typically require a minimum deposit to open.
- A fee may be charged for an early withdrawal, which can amount to around 3-6 months worth of interest.
Recommended Certificate of Deposits (CDs) Companies: Bank of Internet Certificate of DepositThe bottom line is that everyone needs some kind of short-term or emergency saving account that they can get access to if needed. However, your short-term savings will probably never show you the type of return you would see if you were investing your money in stocks and that is why it is still important to invest money into the stock market for a long-term saving account. A good rule of thumb should be: Your short-term saving account should be able to get you by in case of an emergency, while your long-term saving account will be there for you when you decide to retire. |
