If you don’t have $1000 available to open a money market fund, you might look into money market funds that waive an opening minimum deposit if you set up an automatic savings plan and have money moved from your bank account to your money market on a consistent (and automatic) basis. The minimum amount to save on an automatic savings plan will vary from one fund to another but most require at least $50 per month.

Another option for using money market funds for individuals who don’t have a minimum deposit is to use Paypal. Paypal considers the money saved in your Paypal account to be part of money market funds (if you select that option) and the yield varies depending on the market – just like other money market funds. Visit www.paypal.com for more information about how you can opt to include your Paypal account balance in the mutual fund.

Safety of Money Market Funds

A money market fund is not federally insured by the FDIC the way a savings account is. Despite of the lack of insurance, money market funds are considered to be an extremely safe investment. Money markets started in the 1970′s, and out of the hundreds of funds only 2 have ever had financial trouble.

The reason money market funds are considered safe is because regulations only require that 5% of a fund’s assets are held of any on institution other than the obligations of the US government. The safest money market funds are those that only invest in US securities. In exchange for the increased safety net, you’ll earn a point or two less interest.

Tax-Exempt Money Market Funds

The dividends earned on most money market funds are completely taxable but there are some funds that invest in tax-exempt securities which means their dividends are not taxed by the IRS at the federal level. You do still have to handle state and local taxes on these dividends. It doesn’t make sense to buy tax-exempt funds unless you are in a high tax bracket because their yields are much lower than those paid by taxable money market funds.

Money Market Funds was created by and is property of American Consumer News.

Why Bother With Short-Term Savings?

The general recommendation is for people to have enough money stashed away to cover these unexpected occurrences for a period of three to seven years.  If you don’t have this savings set up, you’ll find yourself charging all of life’s unexpected events (or perhaps things you should have been able to foresee but you just didn’t plan for them!) on high interest credit cards, or heading to the bank for yet another loan.  Avoiding this kind of last-minute borrowing will also avoid the potential for high interest payments that end up costing you five to ten times the original price.

How Much Do You Need?

The actual amount you decide to set aside in short term savings will of course be a personal decision, but there are some things you can take into consideration to help you determine a good dollar amount.  Ask any financial planner and they’ll tell you you should have three to six months of living expenses saved, no questions asked.  Does that sound like a lot to you?  And that’s the minimum amount you should have saved!  You should anticipate your typical monthly expenses, as well as some additional money for automobile maintenance or home repairs- because you know Murphy’s Law will be put into action if you are out of work or injured- that’s exactly when your stove and refrigerator will both require replacing, too.

You should think about any large ticket items you’re considering when deciding how much money to set aside, too.  Are you hoping to take a cruise in two years?  Put a down payment on a new car? Get married?  These are all expenses that normally take a dip into your savings account, but if you have more money in your short term savings you might be able to avoid wiping out your long term savings.

Where Do You Stash the Cash?

There are a number of places you can save money, but when talking about savings options that are short-term and accessible when you need them, there are about four major contenders. 

Checking Accounts
    A checking account is actually intended for many transactions; and that’s the reason they pay little or no interest in most cases.  There are a few online banks offering checking accounts with higher interest though, and are worth looking into.  You can obtain money from a checking account as quickly as you can write a check or swipe an ATM card.

Savings Accounts
   This is the old-fashioned resting ground for your short-term savings.  Everyone in your grandmother’s day had one of those passbook accounts at the local bank and earned 1-2% savings on the money they faithfully deposited every week.  If you want to keep your money in a savings account for your short-term savings, look around for higher interest savings accounts, which may be through online banks, or through promotions with local banks in your area.

Money Market Accounts
   One of the few investment areas that are FDIC insured, money market accounts are often used to stash short term savings.  Money is easily accessible, often with ATM cards or sometimes with checks. Just watch that your balance doesn’t fall below the minimums because you may have to pay fees when that happens.

Money Market Funds
  Money market funds offer the highest possibility for returns, and are as accessible as your typical  bank account.  While money market funds are considered very safe, there is no guarantee that you won’t lose money with this type of investment/savings.

Short Term Savings: Why Do You Need it, How Much Do You Need, and Where Do You Put it? was created by and is property of American Consumer News.