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Market? Mattress? Neither!

A piggy bank is a fine place to toss that spare change jangling in the bottom of your purse. But for any amount more substantial, you can do better. Seriously better.

Of course you know that stashing your rainy-day money in a mattress is like highway robbery in reverse -- it cheats you out of any chance to earn interest on your dough, and, with inflation, actually leaves you with less spending power. However, settling for a checking-account interest rate that starts with a decimal point or betting your next paycheck on a high-flying stock is just as senseless.

In the mattress-market spectrum -- that place between overexposure to risk and losing money because of fear, inflation, or plain old inertia -- there are plenty of rewarding places to park your cash. But first, a message from our sponsors ...

The worst place for your short-term money
The Motley Fool's opinions on where you should invest are pretty clear. It's no secret that we think the stock market is the place to be. But -- please note that big, italicized, capital B "but" -- only if you have the time to let the market work its magic.

Given the market's natural ups and downs over the short term, there's a big risk in putting the wrong dollars in our favorite investment vehicle. When it comes to investing smartly in stocks, it's all about commitment -- long-term, unwavering commitment.

Taking the stock market off the list of potential places to park your cash still leaves a wide-open world of options worth consideration. Here's a teaser on what you might be passing up if you've been settling for whatever your bank shells out as a thank-you for playing host to your dough:

Parking Spot

Deposit Amount

Interest Rate/APY

Interest Earned After One Year

Interest Earned After Five Years

Interest checking

$1,000

0.25%

$3

$16

High-yield checking/savings

$1,000

3.4%

$35

$185

Money market account

$1,000

5%

$51

$283

One-year certificate of deposit

$1,000

5.2%

$53

$296

Source: Bankrate.com data and the Fool's "How much will my savings be worth?" calculator

Going for the gusto with a CD (and getting 280 more clams than you'd get from your checking account) looks like a no-brainer. But don't leap with your fistful of cash until you ponder the pluses and minuses of the accounts listed above.

The key cash stash question
The most important question to answer about every dollar bill you don't spend on shelter, sustenance, and the occasional electronic doodad is this: When do you need to get your mitts on the money?

Answer honestly, keeping in mind the strength of your stomach lining and that of others in your household affected by your decision. If the answer is 10 years from now (e.g. retirement, college savings, facelift fund), then please scroll up and click those links in paragraph five.

If you plan on accessing the cash any time between five and 10 years from now, do some soul-searching about risk factors by asking yourself how you'd handle watching the value of your savings decline, say, a year or so before you planned to tap into it. Could you change your plans? On the other hand, would playing it too safe with that money rob you of a richer home remodeling or new RV fund? Take a moment. We'll wait.

Any time frame of less than five years (three if you like to live on the edge) points pretty strongly to any parking place that's not the stock market -- and, trust us, there's a wide world of short-term savings options.

Next, it's important to consider the issue of flexibility -- how often you'll need to access the cash, the penalties of breaking the rules. Here are some guidelines to consider.

I need a place to park everyday spending money
High-yield savings and checking accounts are an ideal place to park money for your monthly bills. They offer flexibility (you can add or withdraw funds at any time) and liquidity (your dough isn't locked in for a specific time period). Some even boast interest rates on par with short-term CDs. The best rates by far are offered by online-only banks, which keep costs low by cutting back on frills. (Most transactions will be done online, and the account may only be a place to park cash, not manage bills.) You will need to keep your oldfangled bank account open to transfer money back and forth.

Drawbacks: Bare-bones banks with no ATM/debit access or check-writing privileges can be a big hassle if you need your cash fast. Customers must coordinate their cash flow by transferring money back and forth from the online bank to a linked checking/savings or brokerage account. That means delays -- two to five days -- before everything's reconciled. Also, watch out for limited-time teaser rates by researching the product's six-month interest rate history.

Where to go: Bankrate.com lets you search a broad universe of banks and sort the results not just on the annual percentage yield (APY), but opening minimums, fees, and services (such as ATM and online access). Don't be blinded by a high APY -- those fees can add up and turn a great deal sour with just two trips to a foreign ATM. The results you're served may not include local banks and credit unions. It's worth your while to go the extra distance and poke around on the websites of your local banks, too, since often they can beat even the best deals offered by the biggies.

I'm looking to earn a few extra shekels on my infrequently accessed cash
For money earmarked for irregular expenses, or a place to park a windfall for a short while, money market accounts and money market funds are the perfect piggy banks. The interest rates are better than those of a savings account. And if the money isn't mingling with your everyday dough, you'll be less apt to spend it.

First, decide between a money market account (MMA) or a fund (MMF). The former is a banking product; the latter comes from a mutual fund company. What's the difference? First, MMFs are not FDIC-insured. You're unlikely to lose your money, but it can happen. Second, the fees can fleece you. Most MMFs have expense ratios of less than 1%, but many fund families have slowly been inching up their fees. Plus, if you buy through your brokerage account, factor in those transaction costs, too. If taxes are an issue, a tax-free MMF may be your best bet. Despite their typically lower yields, your eventual return can be competitive with both taxable MMFs and MMAs.

Drawbacks: Less nimble than checking accounts, many money market products limit transactions (typically six or fewer withdrawals per month), and the penalty fees can be brutal. Also, some online deals require customers to open a checking or savings account with that institution to avoid fees.

Where to go: Money market accounts and funds come in many different flavors. Over at our Motley Fool Green Light service, where we let you cheat off our homework, we've recommended Vanguard's Prime Money Market (VMMXX) because of its rock-bottom expense ratio (0.30%), as well as Citibank's e-Savings account (best for those who already have a Citibank checking account).

I'm saving up for an expense a few years down the road
Saving up for a renovation? Certificates of deposit (CDs) are time-based investments (anywhere from a month to several years) that guarantee your principal while providing a fixed amount of interest. One thing's for sure, CDs aren't just for grandma anymore

Drawbacks: Commitment-phobes beware! You're locking in not only your loot, but also your interest rate. Also, should you unexpectedly need your cash, the penalties for early access (in interest and even the principal) will break your heart. You can limit the downside by choosing a shorter-term CD, then rolling your money into another once it matures.

Where to go: Here again, online banks with their lower overhead often offer door-buster deals. Bankrate is, again, a great place to start your search. You'll see all the biggies -- ING (NYSE: ING  ) , NetBank, Bank of Internet USA (Nasdaq: BOFI  ) , E*Trade (Nasdaq: ETFC  ) , and so on. The trick here is to research rates for a range of time frames (e.g. six-month, one-year, 18-month, 2.5-year CDs). If your timeframe is flexible, taking this extra step will ensure you're not leaving earnings on the table.

And isn't that the whole point of finding someplace other than your mattress for your cash?

For more pointers on finding rock-star parking for your short-term money, check out the following Fool.com articles:


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