As you sift among the various options for your short-term investments, keep these key items on your dashboard: yield, guarantees, liquidity and your individual situation.
The short-term investments that promise the highest yields often come with at least some risk and/or constraints on your daily access to funds. It may be that youâre just looking for the highest safe yield and donât care that much about liquidity. Or maybe having ready access to your funds is the name of the game.
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Also think through whether you value an ironclad guarantee or are willing to go without in exchange for a potentially higher yield. Some cash instruments are fully FDIC-insured, while others are not. On the short list of FDIC-insured investments are checking and savings accounts, CDs, money market accounts (not to be confused with money market mutual funds), and online savings accounts.
Certificates of deposit
CDs will typically offer the most compelling yields of all cash instruments, and theyâre also FDIC-insured.
Yet there are a couple of caveats. One is that minimum deposits for the highest-yielding CDs might be $25,000 or even higher. Thereâs also a trade-off on the liquidity front: Youâll usually pay a penalty if you need to crack into your holdings before the maturity date. The longer the term of the CD, the bigger the penalty for cashing out early.
Online savings accounts
If you want daily liquidity, a decent yield, and FDIC protection, your best bet will tend to be a high-yield savings account through an online bank or a savings account through a credit union. The former offers FDIC protection, up to the limits, whereas credit union accounts are insured by another entity, the National Credit Union Administration.
Money market mutual funds
Money market mutual funds also offer daily liquidity and the convenience of having those funds live side by side with your long-term investments. But money market fund yields are still generally below those of online savings accounts today. Additionally, money market mutual funds arenât FDIC-insured, though in practice most funds have done an excellent job of maintaining stable net asset values.
Donât confuse money market mutual funds with brokerage sweep accounts, though both are offered by investment providers. Interest rates on brokerage sweep accounts, which hold investorsâ cash that hasnât yet been invested, have ticked up a bit recently but are still well below other cash options.
Stable-value funds
Stable-value funds are another example of an investment that offers an often-decent yield in exchange for not checking the liquidity and guarantee boxes.
Stable-value funds are only accessible inside of company retirement plans. They invest in bonds, so theyâre not FDIC-insured; to protect investorsâ principal, they employ insurance wrappers to help maintain a stable net asset value. Just bear in mind that stable-value funds carry drawbacks. Because you can only own such a fund within a 401(k), youâll pay taxes and penalties to withdraw your money before retirement unless you meet certain criteria. So donât think of a stable-value fund as an emergency fund unless youâre already retired or close to it.
Honorable mention: I Bonds
In contrast with the preceding investment types, I bonds are the only safe investment vehicles that will guarantee to make investors whole with respect to inflation. I bonds are Treasury bonds that pay a fixed rate of interest as well as another layer of interest that varies with the current inflation rate, as measured by the Consumer Price Index.
As attractive as that is, it comes with a few asterisks. If you redeem an I bond within five years of buying it, youâll forfeit three monthsâ worth of interest. Purchase constraints are another drawback for large investors.
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to⯠https://www.morningstar.com/personal-finance
Christine Benz is the director of personal finance and retirement planning at Morningstar.