Saving for short-term goals can be a challenge. With interest rates near historic lows, the average savings account returns less than 0.2 percent annually, but vehicles with the potential for better yields (such as IRAs) don’t let you withdraw cash easily in the case of an emergency or big purchase. If you’re looking for short-term savings that have more return potential than a savings account (but greater accessibility than a retirement plan) this list is for you:
1. Certificates of Deposit (CDs)
These FDIC-insured investments mature anywhere from three months to five years. But if you need to cash out a CD prematurely, you’ll pay a penalty.
Tip: The longer your money is tied up, the greater the return. A six-month CD will pay less than a five-year CD, for example, so choose according to your earnings and savings goals.
(The FDIC, or Federal Deposit Insurance Corporation, was created as an independent agency of the U.S. federal government in 1933. It insures deposits of up to $250,000 per member institutions.)
2. Money Market Funds
Available through brokerage firms or mutual fund companies, money markets target a steady rate of return (historically in the low single digits) by investing in CDs, government securities and other low-risk vehicles.
Tip: There is a small annual fee for investing in these funds, and positive returns aren’t guaranteed.
You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. The Fund may impose a fee upon the sale of your shares or may temporarily suspend your ability to sell shares if the Fund’s liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund’s sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.
3. Money Market Accounts
Like money market funds, money market accounts also invest in short-term, low-risk vehicles. The difference is that money market accounts are generally available through banks, and they are typically FDIC insured up to the maximum allowed by law.
Tip: Some money market accounts offer check-writing privileges and let you connect to a checking account.
4. Treasury Bills (T-bills)
Backed by the U.S. government and maturing in less than a year, T-bills are purchased at a slight discount and sold back to the government at maturity for full face value. Common maturities are four weeks, 13 weeks and 26 weeks.
Tip: T-bills can be purchased commission-free on TreasuryDirect.gov.