By now, many people have learned the essential process for making long-term savings decisions: If you're investing for something years away — the classic case is retirement — you invest for growth, typically in the form of domestic and international stocks, with a portfolio that's highly diversified and low-cost. For long-term objectives, time is your ally, enabling you to ride out the inevitable ups and downs of the markets. More downs than ups lately, which to long-term investors means it may be time to add stock exposure — but that's a column for another day.

I'm receiving a lot of questions from people about investing for the short-term. The general interest rate environment is very low. It's easy to find, for example, a savings account that pays .25 percent per year (that's one-quarter of 1 percent), but it's hard to locate a decent return for short-term assets. And some people don't fully appreciate the role of short-term resources.

YOUR "DEFENSE" MONEY

As a wise man once put it: "Don't play offense with your defense." Short-term assets are your defense; you should not expect to get rich from them. Short-term assets serve you soon — your emergency fund for the down payment on a house you would like to purchase in the next year or so, to pay a substantial bill you know lies ahead or even the general pool of liquidity you use for day-to-day expenses. Your objective for short-term money is simple: Protect it from loss and keep it ready.

Why does this matter? You might think, for example, a 20 percent loss is a 20 percent loss, regardless of the asset. But if you're 35 and you have $50,000 in your 401(k) plan — money you won't need for another 25 years or longer — that 20 percent drop will probably be forgotten by the time you start to access that money. Now imagine you've got $50,000 saved for the down payment on your first home. If you made a risky move with that asset and lost 20 percent, you've seriously damaged your home buying options.

When you consider what to do with your short-term money, think safety (you don't want to risk a big loss) and liquidity (especially if you may need the money quickly).

TIMING AND FLEXIBILITY

Start by figuring out your actual time frame and your amount of flexibility. If you have three months' salary set aside as an emergency fund, you might need it tomorrow or you may never want it. The fact that you could possibly need it tomorrow means you shouldn't put the fund into a certificate of deposit (CD) where the money is locked up; you could lose a substantial portion of the accrued interest if you cashed out the CD before it matured. On the other hand, you know you're going to make a tuition payment next Sept. 1. A one-year CD might be perfect. Many short-term decisions are less clear-cut. With your down payment money, for example, you might be planning to buy a house sometime over the next three years.

There's a good news/bad news story here. The bad news is that your time frame may not allow you to invest in the instrument that can give you the maximum return. But the good news is it doesn't matter too much, since most short-term rates are low.

RISK AND REWARD

Some options are clearly better than others. Traditional interest-bearing savings accounts and most interest-bearing checking accounts pay truly pitiful rates these days, often less than 1 percent. You can do better — so take the time to check the marketplace.

As you start to look around, you'll likely find that money market savings accounts (many of which offer check-writing, ATM access and online bill paying) and checking accounts from online-only banks offer some of the most competitive rates, along with FDIC insurance. All of these present about the same level of liquidity, though it may take a few days to get assets out of an online-only bank; typically, you transfer the funds back to your "real" bank in order to write a check.

I recently looked at national averages for some of these instruments. As of July 17, the average money market account paid 2.42 percent and a number of online banks were paying more than 3 percent. That's not a huge difference, so if you're choosing between the two, your decision is probably based on convenience as opposed to yield.

As I noted above, CDs may contain a place in your short-term strategy and can earn a bit more yield, but you generally can't access your money early without paying a fee. Currently, the average one-year CD rate is just over 3 percent with a five-year CD paying just over 4 percent. But unless you really know when you're going to need your money, and you're sure you won't want it before then, I recommend avoiding CDs for short-term assets.

Given the current issues in the financial sector, you may worry about the safety of your money even in something as benign as an interest-bearing checking account. Remember that most banks offer FDIC insurance up to $100,000 per account (or $200,000 for a joint account per bank). If you stay under that amount, this should not be an issue.

Finally, I know some investors are tempted to push the risk envelope with short-term assets by investing in bonds or bond funds. But this can be risky; bonds, particularly longer-term issues, can be extremely volatile, meaning the risk/reward trade-off might not be worth it. Certainly bonds can have a place in your long-term portfolio; however, be very careful if you decide to chase yield with short-term assets, especially if you know you're going to need them in the next few years.

When people ask me, "What should I do with my money today?" I always go back to one of the core principles of investing: What are your goals? With short-term money, your purpose should be safety and liquidity. Return has to be secondary. Keep those in mind, and you'll make the right choice.

Carrie Schwab Pomerantz is Chief Strategist, Consumer Education, Charles Schwab & Co., Inc., Member SIPC. You can e-mail Carrie at askcarrie@schwab.com. To find out more about Carrie Schwab-Pomerantz and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.

COPYRIGHT 2008 CREATORS SYNDICATE INC.