Investment Vehicles: The Short Term

Here, we’re going to quickly talk about the different investment vehicles you have open to you, how they work, and what some of the pros and cons are for each of them.

Short Term Savings Vehicles

SAVINGS ACCOUNT Nearly everyone has a savings account at some bank.  These accounts allow you to easilly take cash in and out of your account and earn a little interest (usually between 0.5% and 3%).  Over all, good to have for your spending money, but in the grand scheme of things, they offer very little.  These accounts are FDIC/NCUA insured up to $100,000 and you cannot lose money in these accounts.  You pay taxes on interest at your marginal tax bracket.

MONEY MARKET FUNDS Money market funds work nearly like your savings account at a bank with certain limitations on how you move your money around (many people don’t even notice these limitations).  These accounts are often sometimes billed as High-Yield Savaings Accounts and that’s just how they seem to you, the customer.  But in reality, the bank treats these accounts differently.  The money is invested in extremely short-term bond mutual funds and the money market fund share is designed to be worth $1 at all times.  In the end, these are the recommended accounts if you need your money quickly.  These accounts are usually FDIC/NCUA insured up to $100,000 and you cannot lose money in these accounts.  You pay taxes on interest at your marginal tax bracket.

CERTIFICATE OF DEPOSITS (CD) The interest rate of a CD is usually about the same of short/medium term bonds depending on the duration of the CD.  During the duration of the CD, you do not have access to the money (except in extremely rare circumstances).  You can have the interest go into another account, or keep compounding in your CD.  CDs can last anywhere from 3 months to 10 years.  CDs are FDIC/NCUA insured up to $100,000 and you cannot lose money in these accounts.  You pay taxes on interest at your marginal tax bracket.