Saturday 23 January 2010

Short-term investments: Savings Accounts, Money-Market Funds, Treasury Bills and Certificate of Deposits

The Pros and Cons of some Basic Investments

Savings Accounts, Money-Market Funds, Treasury Bills and Certificate of Deposits

All of the above are known as short-term investments.

They pay you interest.  You get your money back in a relatively short time.

In savings accounts, Treasury bills, and CDs, your money is insured against losses, so you're guaranteed to get it back.

Money markets lack the guarantee, bu the chances of losing money in a money market are remote.

One big disadvantage:  They pay you a low rate of interest.

Sometimes, the interest rate you get in a money-market account or a savings account can't even keep up with inflationLooking at it that way, a savings account may be a losing proposition.

Inflation is a fancy way of saying that prices of things are going up.  Another way to look at inflation is that the buying power of the dollar is going down.

The first goal of saving and investing is to keep ahead of inflation.  Your money's on a threadmill that's constantly going backward.  In recent years, you had to make 3 % on your investments just to stay even.

That's the problem with leaving money in a bank or a savings and loan.  The money is safe in the short run, because it's insured against loss, but in the long run, it is likely to lose ground against taxes and inflation. 

Here's a tip - when the inflation rate is higher than the interest rate you're getting from a CD, Treasury bill, money-market account, or savings account, you're investing in a lost cause.

  • Savings accounts are great places to park money so you can get at it quickly, whenever you need to pay bills. 
  • They are great places to store cash until you've got a big enough pile to invest elsewhere. 
  • But over long periods of time, they won't do you much good.

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