Who wants more money? Alright, dumb question. Of course we all would like more money. What you may not know is that you may be missing out on free money every day. There’s this thing called interest. What? You’ve heard of it? Great! Then you already know that banks will pay you when you put your money with them. Here’s the not so big secret that many people don’t act upon: Banks (and other financial institutions) will pay you differing amounts based on what type of account you place your money in, how much money you give them and for how long you let them use it. Bankrate has a good overview called Great Places To Park Your Cash.
There are 4 basic areas where you can park your money:
1) Checking Accounts – A bank account in which checks may be written against amounts on deposit. (Answers.com) Because of the liquidity of this account, few banks, if any, will pay you interest unless you have a load of cash sitting in them. The exception to the rule is that many online banks are beginning to pay interest on their checking accounts. However, the fees will probably eat up whatever interest you may earn. Here is a look at what online banks are currently offering.
2) Savings Accounts – The traditional alternative to hiding your money under the mattress. This is where most people put the money that isn’t in their checking account. Most brick and mortar banks pay minuscule amounts on these accounts. I think my bank gives me something in the neighborhood on 1%. If you like the idea of a savings account but are looking to earn a little more interest then you might like the idea of a money market account.
3) Money Market Accounts (MMAs) – These are becoming more and more popular, especially as online banking becomes more popular. The interest rates are higher, but there are a few limitations. Generally, these accounts limit the amount of transactions you can make per month. They also will generally require you deposit $500-$1000 to open the account, although you can generally keep less than that in there once it’s open. This type off account is what I use until I can move money into my IRA or some other investment. You can see the top rates here, but personally I prefer ING Direct. If you’d like to learn more about money market accounts, take a look at How do money market accounts work?
4) Certificate of Deposits (CDs) – According to the Free Financial Dictionary, CDs “are a savings certificate entitling the bearer to receive interest. A CD bears a maturity date, a specified interest rate and can be issued in any denomination. CDs are generally issued by commercial banks.” This was your grandpa’s idea of a safe long term investment. For an individual, I really don’t see much of a use for these. I don’t like having my money tied up for long periods of time where there are, in my opinion, much better investments out there that are nearly as safe but have a much better return. But, if you’re still in love with CDs, you might like this article from Money Magazine.
Agree? Disagree? Leave me a comment and let me know your thoughts.
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For convenience you might want to check out the options that your brokerage has. For instance, you might be able to park some money in a money market account that pays like 4.7%, with the only restrictions being turnaround (2-3 days), and minimum sizes ($2500). I did a post here that might be useful… http://www.thealexblog.com/2006/10/24/what-should-i-do-with-my-cash/
[...] Jeremy Waller presents 4 Basic Short Term Investments posted at WallerBlog – A Financial Advice Blog, saying, “You may be missing out on free money every day. Here ’s the not so big secret that many people don’t act upon: Banks (and other financial institutions) will pay you differing amounts based on what type of account you place your money in, how much money you give them and for how long you let them use it.” [...]