|
 Bank savings accounts, money-market funds, Certificates of Deposit
(CD’s), and Treasury
Bills (T-bills) (Click here to see the definitions
of these terms.) are known as short-term investments. There are pros and cons to
short-term investments.
Advantages
 Short-term investments mature
in a short time, typically
- Passbook savings accounts and
money-market funds (instant access)
- CD’s and T-bills (three
months to a year)
Short-term investments are
relatively safe because they are guaranteed by the government.
Disadvantages
Short-term investments pay a
low rate of interest, like three to five percent.
Short-term investments may lose
value after adjustments for inflation.
Even though your money earns interest in a bank account, inflation
can take away its real value. As the chart below shows, money in a bank’s passbook
savings account and in money market funds often can’t make enough interest to offset
the losses from inflation. That’s why it is important to understand the other ways to
invest.
Money Market & Passbook Rates Compared to Inflation -
A Losing Proposition
| Year |
Money
Market |
Passbook |
Inflation |
Inflation
Adjusted |
Inflation
Adjusted |
|
Fund
Rates (%) |
Savings
Rates (%) |
(%) |
Money
Mkt (%) |
Passbook
(%) |
| 1975 |
6.4 |
5.3 |
9.1 |
-2.7 |
-3.9 |
| 1976 |
5.3 |
5.3 |
5.8 |
-0.5 |
-0.6 |
| 1977 |
5.0 |
4.9 |
6.5 |
-1.5 |
-1.6 |
| 1978 |
7.2 |
4.9 |
7.7 |
-0.5 |
-2.8 |
| 1979 |
11.1 |
5.1 |
11.3 |
-0.2 |
-6.2 |
| 1980 |
12.7 |
5.2 |
13.5 |
-0.8 |
-8.3 |
| 1981 |
16.8 |
5.2 |
10.4 |
6.4 |
-5.2 |
| 1982 |
12.2 |
5.2 |
6.2 |
6.0 |
-1.0 |
| 1983 |
8.6 |
5.5 |
3.2 |
5.4 |
2.3 |
| 1984 |
10.0 |
5.5 |
4.3 |
5.7 |
1.2 |
| 1985 |
7.7 |
5.5 |
3.6 |
4.1 |
1.9 |
| 1986 |
6.3 |
5.5 |
1.9 |
4.4 |
3.6 |
| 1987 |
6.1 |
5.3 |
3.7 |
2.4 |
1.6 |
| 1988 |
7.1 |
5.5 |
4.1 |
3.0 |
1.4 |
| 1989 |
8.9 |
6.1 |
4.8 |
4.1 |
1.3 |
| 1990 |
7.8 |
5.8 |
5.4 |
2.4 |
0.4 |
| 1991 |
5.7 |
4.3 |
4.2 |
1.5 |
0.1 |
| 1992 |
3.4 |
2.9 |
3.0 |
0.4 |
-0.1 |
| 1993 |
2.7 |
2.5 |
2.8 |
-0.1 |
-0.3 |
| 1994 |
3.8 |
2.6 |
3.0 |
0.8 |
-0.4 |
| 1995 |
3.5 |
2.5 |
2.7 |
0.8 |
-0.2 |
Source: IBC’s Money Fund Report; US Bureau of Labor
Statistics; Federal Reserve
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