Short term savings refers to money that you keep out of your checking account and stash away somewhere close in case of an emergency or a planned expense in the not too distant future.

This may be a fund for something unexpectedly unhappy like car repairs, or it may be for something like college tuition in the fall when it’s only April.

It’s difficult to set aside money and just pretend it’s not there, so your short term savings fund may need a little fence around it that you’ll only leap over in case of emergency. Some accounts are more liquid than others. Liquidity refers to how available your money is when you want it. In a checking account it is almost instantly liquid, and in a savings account associated with your checking account your money is nearly as available. If you feel you need more of a wall around your money so that it doesn’t tempt you when you see a plasma television on sale, try a certificate of deposit, or a money market account, or short term Treasury bonds. There is just enough pain associated with liquidating funds from those investments that you may just wait for a real emergency.

You probably recognize that it’s a good idea to set some money away for the proverbial rainy day, but let’s talk about some of the dire circumstances that can result if we don’t.

Let’s say that you need $3000 for home repairs or some other unexpected and annoying circumstance. You may have a credit card in your possession that has that amount available, but a credit card can be a real weight on your monthly expenses for months and months if you aren’t able to pay it off quickly. Money in effect borrowed on a credit card is one of the most painfully expensive ways to borrow money and we should do it under only the most dire circumstances.

Or you may have a stock that you wanted to sell but have been holding until it went just a bit higher. Disaster strikes and you suddenly need $5000, so you reluctantly decide to sell the stock at its current price but before you can do so the market plummets and your stock is worth considerably less than it was the week before.

Neither of these scenarios marks you as a savvy handler of money.

So, decide to set some money aside into an account that suits you. If you have an iron will and can keep your hands off, put the money in a savings account. You may want to open the account in another bank or a credit union or an online bank so that you can’t access it on a whim.

If you need more of a fence around it, short term Treasury bills are bonds that mature in as little as weeks or months. This investment is good for an expense that you see in the future and can afford to put the money away in for awhile. Or maybe a certificate of deposit is right for you. CDs also can have maturities of just a few months and you can withdraw the money before the investment reaches full term if you are willing to pay a penalty.

Perhaps the best option is to invest in a money market account (not a money market fund, which is something else) which is a good way to invest and make interest but allows you to write a small number of rainy day checks.

Review the many options available for short term savings. Compare the rates and terms and see which investment program pays the highest and works with your saving and spending profile. They may have just the thing to keep you out of the rain.

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