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Money Saving Options for the Short Term

We all need to save money, but it can be challenging. With global turmoil, we never know what is in store for our economy so having a money saving plan in place can be very reassuring, but where should you start?

There are some short-term money saving solutions available, but remember that short-term options normally offer lower returns than long-term solutions because banks and other institutions use the money you invest or deposit, and they are willing to pay more if they can use that money for a longer period of time. In other words, short-term options offer a lower rate because they are more liquid.

Short term refers to five years or less and liquidity simply means your cash is readily available. When an asset can quickly be turned into cash, it is considered a liquid asset. Items like investment properties, homes, and cars are not liquid because they usually take quite a while to sell. Bank accounts, and certain stocks and bonds are somewhat liquid, because they can be converted into cash fairly quickly, but you may lose money on both of the latter. Stocks sold at an inopportune time could end up costing you money rather than just earning you a lower return than expected, and many bonds, certificates of deposit (CD's), and the like charge penalties for cashing in early.

Let's take a closer look at various short term solutions:

Savings Accounts

Many people choose regular savings accounts due to the low risk associated with such a savings plan, but on the same token, their return is as low as their risk. Savings accounts may offer about 2% interest, and many pay far less, depending on the minimum deposit and minimum balance. You can open a savings account, sometimes referred to as a "passbook" account, at any bank within a matter of minutes, and your deposit is protected by the FDIC, up to $100,000.

It's better than hiding money under your mattress, which earns you nothing, but there are options that are more lucrative. While your money is liquid—you can access it or remove it at any time— and there is little risk involved, banks do not pay premium rates for these types of accounts.

Premium Savings Accounts

Premium savings accounts are in essence the same as Money Market Accounts but are FDIC insured. These accounts are offered by companies like ING Direct, Emigrant Direct, and other online banking groups. Because they do not have branch offices, and transactions are conducted electronically therefore reducing overhead, they are able to offer more competitive rates.

While ING Direct has been considered the leader for some time, others have become very competitive, offering higher rates and lower minimums. This is a very competitive field. ING direct is cited as being stubborn about raising its rates lately, but recently rose from 3% to 3.75%. Emigrant Direct currently offers 3.25% with a low $1 minimum.

Money Market Accounts

A Money Market Account, or MMA, is a savings account with a premium rate that is somewhat less liquid than the average savings account. While you are typically able make a certain number of withdrawals from an MMA for a given month, there are restrictions. Money Market Accounts are easy to obtain and are available at most banks. They are insured by the FDIC for up to $100,000 as are other bank accounts. They usually offer a higher rate of interest, which is currently about 2 -3.25%, or nearly twice what regular savings accounts offer.

You can also find higher yield Money Market Accounts that are offered by huge corporations like Ford and General Electric. While their rates are tempting, note that your money will not be insured by the FDIC, and if the company becomes insolvent you will lose your money. Additionally many Money Market Accounts have high minimum balances.

Certificates of Deposit

Also known as CD's, certificates of deposit are basically loans you make to the bank, instead of the other way around. You place a certain amount of money in a CD for a specified time period, usually anywhere from six months to five years, and the bank pays you a decent amount of interest. CD rates vary, but you may earn 5% or more with longer term certificates.

Certificates of Deposit are insured up to $100,000 by the FDIC, and may have fixed or variable rates depending on the type you choose. Remember, if you withdraw your CD before it matures, you will have to pay an early withdrawal fee and may lose much of the interest you've earned.

Credit Unions

Legislative changes have created a completely new world when it comes to credit unions, and they are no longer small co-ops available only to the employees of one specific company. This change has caused credit unions to soar in popularity.

Credit unions are also more user friendly than big banking and tend to offer excellent service and rates. Competing with the "big guys" gives credit unions the incentive to offer consumers more on all sides. While rates vary amongst credit unions, many offer competitive interest rate--often better rates--drawing customers away from traditional institutions.

Part of the reason is because banks are in business to turn a profit. They are required to make money for shareholders, while credit unions are not for profit establishments. Credit unions provide for the member, rather than for shareholders. Credit unions frequently offer excellent rates on loans, mortgages, and credit cards, while at the same time offering the highest interest for savings plans.

Deciding which option to choose

Saving money is a necessary part of living today and the sooner you get started the more money you will be able to accumulate over time. This information should help you get started. You may want to consult with a financial professional before making a decision, but ultimately you have to do what you feel is best for you or your family.

Research each option carefully before making a final decision and remember that despite penalties that occur with some options, you can access your money if the need arises. You work hard for your money, so you might as well make it work for you while you can.

This article was written by Sherry Holetzky.