Considerations When Investing in Short Term Accounts
When looking for the best short term money investments, its important to remember to leverage your money’s importance with the banking institutions. Many people look for a short term investment opportunity while determining what the best options are for a longer term strategy. Knowing this fact, many financial firms will tempt you with offers that seem good on the surface, but really offer little advantage to you and your money.
Things to remember when investing your money in a short term account or fund is accessibility, how much interest you will accumulate, the quality of service from the bank and any penalties you will accrue from the eventual withdrawal of the funds. Many options limit the amount of times you can move money, so its important to make a determination regarding whether you will need to access the funds during the interim.
Likewise, since the service is simply holding your money for a brief period of time, you want to make sure you are getting the best interest rate return for the time period. Different investors also require different levels of service, some prefer in-person assistance, while others like to handle the account themselves. Finally, it is very important to determine how much you will eventually pay when you choose to move the money from the account to a long term investment.
Above right: Certificate of Deposit. (Supplied by the US Postal Service; Public Domain; https://upload.wikimedia.org/wikipedia/commons/6/68/US_Postal_Savings_System_5.jpg)
Money Market Accounts
Many banks offer options for short term investing known as money market deposit accounts. These also require a minimum balance and pay a higher rate of interest. They also provide good liquidity compared to most short term options. However, the number of transactions per month are most likely predetermined when you open the account.
Another one of the best short term money investments is to put your money directly into the U.S. government in the form of treasury bills or treasury notes. Bills are those that require less than a year to mature, while notes take two to 10 years. Widely considered one of the safest investments in the world, both bills and notes are backed by the credit in the government itself. Treasuries are exempt from state and local taxation, however, they sometimes offer a lower rate of return than the best money market accounts or CDs.
The U.S. government also backs a type of investment known as the I Bond. These are savings bonds based around inflation which are adjusted on a semiannual basis. Like treasuries, they are exempt from state and local taxes and the federal taxes can be deferred for 30 years if the short term investment turns into a long term one. Many people use these as an option to save for college education. The only drawback to I Bonds is the fact that you must hold the instrument for at least a full year. Likewise, if you cash out before five years, you will be charged a major penalty equal to three months of interest.
Much like treasuries, municipal bonds are backed by either a state or local government. They are always exempt from federal taxes and usually from state and local taxes. However, there are numerous drawbacks to this short term investment. If you remove the funds before full maturity, you will lose part of the original investment. In addition, you are required to pay commission to purchase this instrument.
Debt issued by companies can be purchased in the form of corporate bonds. The fascinating thing about corporate bonds as one of the best short term money investments is the fact that you can make a higher rate of interest the less creditworthy the company. Basically, if the investment has more risk, the return rate will be more than if the company is an established success in the market. These investments usually pay high rates of interest, however, investors always run the risk of a company failing.
Other Considerations: Checking, Saving and CD Accounts
Many people choose to place their money into checking accounts. However, its important to remember that these accounts are generally used to conduct transactions rather than generate a profit. This being said, many banks offer checking accounts that will also pay you interest, even high yields as long as you maintain a certain minimum balance. The bonus of this option as one of the best short term money investments is that they generally allow an investor to conduct unlimited accessibility with check writing and ATM access.
When looking for the best short term money investments, many people immediately think of savings accounts. This allows a person to park their money in a bank and generate interest. The problem with this option is the fact that most banks require a very low minimum, meaning some pay very little in terms of return. However, the benefit of savings accounts is the fact that you can generally close the account with little or no penalty.
Commonly known as CDs, Certificates of Deposits are short term investment options that require a specific amount of time to mature. However, the time period can be as low as three months. Both banks and brokerage firms offer these investments, which pay much more than money market accounts. You are capable of pulling the money early if you need to, however, this results in a major penalty.
Things to Remember
In all, you should always remember that picking the best short term money investments can be a challenge. Every investor’s needs are different and can change over time. The best way to make sure you are choosing the correct financial instrument for your situation is to speak to a professional financial advisor who will offer you solutions to meet your needs.
“Short Term Investment Choices” Investor Guide: https://www.investorguide.com/igu-article-443-investing-strategies-short-term-investment-choices.html
“How to Pick the Short Term Investment That Fits Your Needs” Washington State Department of Financial Institutions: https://www.dfi.wa.gov/consumers/education/investments/short_term.htm
This post is part of the series: Learning Investment and Portfolio Managment for Beginners
There are a number of theories regarding setting up a basic investment portfolio when you are first getting started in the market. Strategies such as modern portfolio theory or the single index model can help you choose the best stocks, bonds and derivatives to include in your portfolio.