Three factors go into choosing a place to put your money for the short-term. First, it must be liquid so that you can get your money out relatively quickly. Second, it should offer an interest rate that meets your needs, and third, it should meet your defined risk criteria. High-yield savings accounts are risk-free and liquid, so the question of whether they're right for you goes back to whether or not they offer a high-enough return.
Finding an Account
High-yield savings accounts that are liquid come in two main types -- regular savings accounts with higher interest rates and money market accounts. As long as you get them from a bank, both are secure and insured. While money market accounts might have a limitation on the number of withdrawals you can make per month, they still qualify as being fully liquid. The key to finding the best rate is to shop around. The bank where you do most of your business might not be focused on attracting deposits by providing high savings rates, so there might be a better option across the street. Alternately, many Internet banks offer higher interest rates as well.
Fees and Other Costs
Given the relatively low interest rates available as of July 2013, fees can frequently trump interest rate concerns. For example, if you put $10,000 in a high yield account paying 1 percent per year with a $10 monthly fee, you'll finish the year with roughly $9,980. An account at a local bank with a 0.25 percent yield and no fees is actually the better deal, since you'd finish the year with $10,025. If you have to pay wire transfer fees, or if you need to order checks to take advantage of a high interest rate on a promotional high-yield interest-bearing checking account, those fees could also swallow up some of your savings.
Savings vs. CDs
Depending on how you define short-term savings, you might want to consider a certificate of deposit. In a CD account, you agree to leave your money in place for a set period of time, usually measured in months or years. In exchange for knowing that it has the use of your money, your bank theoretically pays you a higher interest rate. However, given the prevalence of high-yield savings accounts, CDs don't always pay more. Therefore, before agreeing to lock your money up, make sure that you're getting a higher rate than you would with a high-yield savings account.
Another option to get a higher yield is to save your money with a fund or a company that isn't a bank. Your stockbroker can frequently sell you a money market fund or a brokered certificate of deposit and, in many cases, the rates that she offers will be better than what your bank offers. When you do this, though, you may be foregoing the protection of FDIC insurance. Some broker-sold CDs aren't insured, and a money market fund from a broker might sound like a money market account from a bank, but it isn't insured.
- Washington State Department of Financial Institutions: How To Pick The Short Term Investment That Fits Your Needs
- Bank of America: Saving for Short-Term Goals
- Bankrate.com: Shopping for the Best Savings Account Rates
- NerdWallet: FAQ: Should I Choose a CD or a High-Yield Savings Account?
- FDIC: Certificates of Deposit: Tips for Savers
- FDIC: Insured or Not Insured?
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.