If you've got a little financial savviness under your belt, you probably know that while most of us would do well to have most of our long-term dollars in stocks, our short-term dollars belong elsewhere. That's because in the short run, the stock market is rather unpredictable, and if you're counting on those short-term savings to be your down payment on a car or home in the next few years, you don't want a market downturn to ruin your plans.
So far, so good. The only problem is that while your long-term money might earn somewhere around the stock market's historic annual average of almost 10% per year, short-term savings typically earn a lot less. At many banks these days, for example, the average rate for a checking account is around 1.4%, per Bankrate.com. The average money market fund is offering a significantly better 4%-or-so rate, but that's still not tantalizing.
This difference is even more grating when you realize that the stock of many solid companies can grow by an average annual rate much higher than that 10%. Check out these 15-year average growth rates:
-
EMC
(NYSE:EMC) : 30% -
Valero Energy
(NYSE:VLO) : 25% -
Adobe
(NASDAQ:ADBE) : 18% -
Walgreen
(NYSE:WAG) : 17%
What to do
Fortunately, you have some more choices. You can learn all about how (and why) you should make the most of your short-term savings in our Savings Center.
One option is using more certificates of deposit (CDs). You don't have to tie your money up for years with them to get good rates. Six-month CDs and one-year CDs were recently averaging around 4.8%, which beats most bank accounts handily.
So shop around a little and try to make the most of your short-term money.
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Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article. The Fool has a disclosure policy.
