One of the personal finance questions I am often asked about is where should they invest their short-term savings.
As I explore further, I often discover that those asking often have short-term goals they are saving for (e.g. grad school tuition payments, home downpayment, wedding, vehicle purchase). They don’t want their savings sitting dormant without earning any return – so they want it invested correctly to maximize its return and ensure their savings grow over time.
As these funds will serve a specific purpose at a certain point in time, the goal should be to preserve principal while increasing return while mitigating risk as much as possible. What kind of financial account would best suit this?
No definitive right answer exists when it comes to investing short-term funds; rather, this should be decided upon on an individual basis depending on various economic factors and current events. But at this point in time there are certain things all should keep in mind when making their decision on where best to place short-term savings.
When saving for an important purchase, volatile securities like stocks and bonds should be avoided as investments. Saving up for something only to have the market crash right before reaching your goal would not be worth taking the risk when there’s no guarantee it will increase in value – you’d sleep much easier knowing your funds are invested safely elsewhere.
Short Term Investment Solutions | How Cash, Savings Accounts, Checking Accounts and MMAs Don’t Hold As Much Punch
Savings accounts, checking accounts and money market accounts (MMAs) have traditionally been popular short-term investment vehicles due to their ease of use, high liquidity levels and FDIC/NCUA insurance of up to $250,000; making them suitable as short-term solutions.
However, at the time of publishing, the national average rate for savings accounts was only 0.09% (0.09% for savings accounts and checking accounts; 0.088% and 0.2% respectively for money market accounts (MMAs); these are near historical low rates – and unfortunately have remained so for several years now.
The federal government estimates the Consumer Price Index (CPI) as 2.5% annually; using current savings/checking account rates, that equates to losing approximately 2.3%-2.34% of your purchasing power every year your funds sit in one of those accounts – while keeping cash under your mattress means losing 2.5% per annum!
Some “high-yield” accounts offer rates above 2%, but you must often go through several hoops before getting one of these accounts – such as being subject to certain number of transactions per month, high minimum balance requirements, direct deposit requirements etc.
Certificates of Deposit Aren’t Aviable Now
CD rates have seen steady decreases and are no longer an attractive short-term investment option.
CDs may not be as liquid as savings/checking/MMA accounts as most CDs impose an early withdrawal penalty if funds are withdrawn before their full maturity of deposit term has been reached. Therefore, before investing your funds in CDs make sure they won’t be needed before then as you could lose money in fees or an early withdrawal penalty could cost more.
As part of my advice for selecting an investment broker, it would be useful to assess what timeframe and rates they currently offer as well as any associated fees or charges.
At current interest rates and with rates anticipated to increase further over time, CDs with maturity dates between three months and one year seem the wisest investment choice. You don’t pay an excessive premium when going longer; furthermore, their is no difference in premium between five, seven, and 10-year CDs.
As is always the case, comparison shop.
Series I Savings Bonds have seen their interest rates increase as inflation adjusts their returns, however these bonds require you to hold them for at least 1 year before any remaining interest is forfeited (if held less than five years, those left may forfeit 3 months worth).
Where are your short-term investments currently stored, and why?
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