You have a short-term savings account, right? I certainly hope so, because such an account, often referred to as an "emergency savings account," is kind of important. (You probably guessed that, given the word "emergency.")
We often go through life ignoring the serious perils around us. We know people who have died in automobile accidents, yet we continue speeding and taking chances, thinking it won't happen to us. We know that carrying extra weight increases our odds of contracting various awful diseases, yet we still reach for that bowl of ice cream.
Financial catastrophes and emergencies are something we all need to brace for. You might think that those millions of Americans mired in credit card debt are there due to wanton and reckless spending, but that's not necessarily true. Many times, people just got blindsided by a financial emergency. According to the folks at the Consumer Federation of America, ". nearly all bankruptcies are triggered by the loss of a job, high medical bills, or divorce."
How to save for the short term
Saving for rainy days a month or a year or two away is different from saving for your retirement or your toddler's college education. The stock market is not the place to be, as the market and individual stocks can be rather volatile over short periods.
Short-term money is best placed in more stable investments, which do, admittedly, tend to offer lower rewards than stocks (but with less risk!). Some options include certificates of deposit (CDs), money market funds, and bonds. Learn much more about this critical topic, including how much you need to save for emergencies, in our Savings Center. (Last time I checked, it even included a link to an ING Group
Maximize your earnings
When socking away short-term dollars, don't resign yourself to lackluster returns. Know that even over the short term, it's worth taking the time to make the most of your money.
Imagine that you keep about $5,000 in a bank account, earning about 1% annual interest. Over 20 years, that would become $6,100. But if you earned 2%, your money would grow to $7,400 -- a $1,300 difference! (That $1,300 represents 26% of your original investment.) At 3%, it would grow to $9,000, and at 4%, to nearly $11,000. The point of this is to show you how differences in even small percentage points can have a big impact on your bottom line.
Your invested quantities matter, too. If you've got $40,000 sitting in a bank account earning 1.5%, that comes to $600 per year. If you move it to an account that pays 5% (and there are some), you'll net a whopping $2,000 per year in interest -- quite a difference!
So what should you do? Seek out the best returns you can find for your savings. We offer more short-term savings guidance in our Savings Center. You can also look up good rates at Bankrate's website. There, for example, I recently found Countrywide, MetLife Bank, Capital One Financial, and E*Trade offering one-year CDs paying around 5% or more.
The folks at bestcashcow.com are also a good resource, regularly offering pointers to outstanding interest rates from banks and brokerages. It recently noted some General Electric
Shop around and make sure your money is earning as much as it can.
Learn more in these articles:
- 50 Simple Tips for Big Savings
- A Quarter a Day
- Prioritizing Your Savings
- The 40-Year Old Savings Virgin
- Where to Put Your Short-Term Savings
Here's to a happier portfolio! (And, hey, consider forwarding this article to anyone whose financial future you care about. Just click on the "Email this Page" link near the top of the page.)
Selena Maranjian 's favorite discussion boards include Book Club, The Eclectic Library, Television Banter, and Card & Board Games. She owns shares of no companies mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . The Motley Fool is Fools writing for Fools.