INVESTMENTS: STARTING SMALL. Beyond passbooks: make your savings grow

A savings account may sound like a logical place to put your savings. But after a certain point, they're not even practical. ``It's a terrible thing to park your money and forget about it,'' says Peter Passell a financial writer. And even though falling interest rates have narrowed the difference in returns, he says, ``it will become a terrible investment if interest rates go up to 8 or 9 percent.''

Unfortunately, ignorance and confusion have already sent millions of Americans down this unprofitable road. A whopping $250 billion sits in bank passbook accounts, where it loses value in an inflated market, and misses the tremendous opportunities for growth, Mr. Passell says.

While you should keep a small amount of money in a passbook account for liquidity - usually around $500 - savings above this should go into a money market deposit account, money market fund, or certificate of deposit.

Financial planners suggest that, in general, it is wise to build up your insured savings until they equal three months of your after-tax income. ``Even people with minimum family responsibilities should keep their first $5,000 of savings in an easily accessible form,'' Passell contends.

Many financial advisers recommend that you first establish an indididual retirement account (IRA), then open a checking account, followed by a savings account with a small amount of cash, followed by one of the money market options. Staying with the market becomes especially important with rising inflation.

Savings accounts can only pay up to 5 percent - the top rate currently allowed by law - and in some cases have been pushed as low as 4.75 percent by falling interest rates.

Money market deposit accounts

Money Market deposit accounts (MMDA's), on the other hand, offer protection, liquidity, and returns that are usually between one and two percentage points higher than passbook accounts - and generally about half a percentage point below that of Treasury bills.

You do have to check around to find the best available deal, though. While banks do have to announce each month the percent interest they intend to pay, they aren't required to pay you all the interest collected on their loans. And they often use a two-tier interest system in which larger accounts pay more than smaller ones.

Most banks still ask for an initial deposit of about $2,000 to $2,500 in order to earn the posted rate, even though the government has dropped its $2,500 minimum requirement. The three-check-a-month rule has also been retained by many banks, despite the fact that the government no longer limits the number of checks that can be written on an MMDA.

However, you can make unlimited withdrawals, and you should be able to find a bank that allows you to transfer funds from an MMDA to an ordinary checking account by telephone or automated teller.

Money market funds

Money Market mutual funds are an uninsured version of MMDA's.

They provide you with almost immediate access to your money, and don't penalize you for withdrawal.

Most money funds have a smaller minimum deposit requirement as well - usually about $1,000 - and subsequent deposits of at least $100. You can generally write an unlimited number of checks, though they usually have to be more than $500 each, and can cash in your shares at any time.

Money funds invest in a variety of conservative money market securities, and the companies or governments to which they loan your money are considered good risks. Each of these borrowers is never entrusted with more than a few percentage points of the fund's total assets.

In other words, the riskiest funds aren't all that risky; but if risk concerns you, look for one that invests entirely in US Treasury securities, or one that backs its investments with insurance from a private insurance company. And make sure you can transfer to another fund if the economic climate changes.

Certificates of deposit

If you don't need immediate access to your money, but still want high returns, consider buying a certificate of deposit. By agreeing to leave a specified amount of money for a fixed period of time, the bank, credit union, or S&L will generally guarantee a higher rate of return than regular savings accounts earn.

And you can start with a relatively small amount of money. Minimum deposits range from several hundred to several thousand dollars, depending on where you live and how many institutions are competing for your money. A bank CD is also a very convenient and safe choice for an IRA.

Because the interest rate on CD accounts is fixed for the life of the certificate, when rates are going down, try to lock into the highest yield possible, and when rates continue to rise, switch your money into a short-term money market account.

Most institutions will penalize you for early withdrawals, but some will not even allow you to take the money out until maturity. So find out what the different policies on withdrawals are, ask about penalties, and make sure you keep a record of all transaction dates. Some banks do offer ``designer CD's'' which let depositors set their own maturity rates for special purposes, like college tuition.

You can often avoid the penalty of early withdrawal, while still enjoying FDIC insurance, by purchasing a CD from a broker. However, just as your CD will go up in price if money market interest rates go down, it will decrease in value if they rise.