When considering short-term investments, itโs crucial to evaluate several key factors, including yield, guarantees, liquidity, and your specific needs. High-yield options often involve some level of risk or restrictions on accessing your funds. You might prioritize securing the highest safe yield available and not be concerned about immediate liquidity, or you might need quick access to your money.
Another consideration is the level of guarantee you desire: are you set on having absolute security, or are you open to taking some risks in exchange for potentially higher returns? Itโs important to note that some cash-based investments come with full FDIC insurance protection, while others do not. FDIC-insured options include checking and savings accounts, certificates of deposit (CDs), money market accounts, and online savings accounts.
Certificates of deposit (CDs) often deliver the most attractive yields of all cash investments and are backed by FDIC insurance. However, they do come with limitations. Often the CDs offering the highest returns require substantial minimum deposits, sometimes reaching $25,000 or more. Additionally, there are penalties for early withdrawal, which means accessing your funds before the maturity date can lead to financial loss, the penalty size depending on the CD term.
Online savings accounts provide another viable option if you seek daily liquidity, reasonable yields, and FDIC protection. High-yield savings accounts with online banks or credit unions can offer attractive options. While online banks offer FDIC protection, credit union accounts are insured by the National Credit Union Administration.
Meanwhile, money market mutual funds offer daily liquidity similar to online savings accounts and can coexist alongside long-term investments. Despite this liquid accessibility, their yields are generally lower compared to online savings accounts. Money market funds, while not FDIC-insured, have historically maintained steady values. However, one should not confuse these with brokerage sweep accounts which, despite slightly higher recent interest rates, still offer lower yields compared to other cash-based investments.
Stable-value funds are another investment avenue, frequently delivering decent yields but requiring compromises regarding liquidity and guarantees. These funds are only available within company retirement plans and, despite not being FDIC-insured, use insurance mechanisms to protect principal investments. Bear in mind, penalties and taxes apply if funds are withdrawn before retirement, limiting their suitability as emergency funds unless youโre retired or nearing retirement.
An honorary mention goes to I Bonds, the only secure investment option guaranteed to keep pace with inflation. I Bonds, which are Treasury securities offering fixed interest alongside variable rates adjusted for inflation, provide safety but come with limitations if redeemed within five years, including forfeiting three months of interest. There are also purchase restrictions affecting large-scale investors.