Short-term cash investments are useful when saving for an upcoming expense and aiming to maximize returns without tying up your money for too long. These investments offer different levels of liquidity and risk, from high-yield savings accounts to money market funds and short-term bonds, each with its own benefits. A financial advisor can help you choose options based on your financial goals and risk tolerance. Here are five short-term cash investments to consider.
1. Money Market Accounts
Money market accounts offer both security and liquidity. Compared to regular savings accounts, money market accounts typically provide higher interest rates. They also offer the convenience of check-writing privileges and debit card access, making it easier to manage your funds while still earning interest. These accounts often require a higher minimum balance to open and maintain.
Funds in money market accounts are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor and per bank. This provides peace of mind. Meanwhile, the competitive interest rates can help your savings keep pace with inflation, preserving your purchasing power. Take note of any fees associated with maintaining the account, as these reduce your overall returns.
2. High-Yield Savings Accounts
High-yield savings accounts offer significantly higher interest rates than traditional savings accounts. They are typically offered by online banks and credit unions. These accounts are also usually federally insured, ensuring that your deposits are protected up to the legal limit.
When considering high-yield savings accounts, compare the annual percentage yields (APYs). Rates at different financial institutions can vary widely. They can also fluctuate based on market conditions, but selecting an account with a competitive APY can significantly enhance your returns.
Many online banks offer fee-free accounts with no minimum balance. At others, it’s best to be mindful of any fees or minimum balance requirements.
3. No-Penalty Certificates of Deposit (CDs)
No-penalty certificates of deposit (CDs), also known as liquid CDs, provide a somewhat different combination of security and flexibility. Traditional CDs impose a penalty for early withdrawal. No-penalty CDs let you access your funds before the maturity date without incurring any fees. This can be an important feature if you think you may need to access your money unexpectedly.
These CDs pay higher interest rates than regular savings accounts, although rates are generally lower than traditional CDs. When considering a no-penalty CD, compare terms and interest rates offered by different financial institutions. Some banks may offer promotional rates or additional features, such as the ability to add funds during the term. Additionally, make sure that the CD is FDIC-insured.
4. Short-Term Bonds
Short-term bonds have maturities ranging from one to three years. They are generally considered less risky than long-term bonds because they are less sensitive to interest rate fluctuations. This stability makes short-term bonds suitable for individuals who may need access to their funds in the near future.
Investing in short-term bonds offers several advantages, particularly in uncertain economic climates. These bonds provide a predictable income stream through regular interest payments, which can be appealing for investors seeking steady cash flow. Additionally, because they mature quickly, investors can reinvest their principal in new bonds at potentially higher interest rates if the market conditions improve.
5. Treasury Securities
Treasury securities are government-issued debt instruments backed by the full faith and credit of the U.S. government, making them one of the safest investment options available. They come in various forms, including Treasury bills (T-bills), Treasury notes and Treasury bonds, each with different maturities and interest rates.
T-bills are short-term investments that mature in one year or less, making them an attractive option for those looking to park their cash temporarily while earning a modest return. The interest earned on Treasury securities is also exempt from state and local taxes.
A primary benefit of these securities is their liquidity. They can be easily bought and sold in the secondary market, providing investors with quick access to their funds if needed. Returns may be lower compared to other investment vehicles, but their stability and reliability make them a prudent choice for conservative investors or those looking to diversify their portfolios with low-risk assets.
Bottom Line
Each short-term cash investment option has features that may be more or less suitable depending on your financial goals and risk tolerance. Choosing the right one can help you manage your cash flow while still allowing for growth. As you explore these options, balance both the risks and rewards for your portfolio.
Investment Planning Tips
-
A financial advisor can work with you to create an investment portfolio that aligns with your goals and needs. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
-
SmartAsset’s asset allocation calculator can help you determine how much to put into cash, stocks, bonds, and other assets, depending on your risk tolerance and investment horizon.
Photo credit: ©iStock.com/yasindmrblk, ©iStock.com/Dragos Condrea
The post 5 Short-Term Cash Investments to Consider appeared first on SmartReads by SmartAsset.
