Bank savings accounts, money-market funds, Certificates of Deposit (CDs), 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.
Short-term investments mature in a short time, typically
Short-term investments are relatively safe because they are guaranteed by the government.
Short-term investments pay a
low rate of interest, like three to five percent.
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 banks passbook savings account and in money market funds often cant make enough interest to offset the losses from inflation. Thats why it is important to understand the other ways to invest.
Money Market & Passbook Rates Compared to Inflation -
Source: IBCs Money Fund Report; US Bureau of Labor Statistics; Federal Reserve