Short Funds: Worth The Investment Risk?

Short-term investments are a great way to diversify your income and offer flexibility when you need it. They are highly liquid, stable, and relatively low risk, so you can rely on your money being there when you need to withdraw it quickly and at low (or no) cost.

There are several short-term investment options, including high-yield savings accounts, money market accounts, and government bonds. These options typically offer lower rates of return than long-term investments but are a good choice if you want to prioritize stability and accessibility with your money.

If you're looking for a safe place to put your money before you need to access it in the near future, short-term investments are a great option.

High-yield savings accounts

These accounts are typically offered by online banks, fintechs, or credit unions, although some brick-and-mortar banks also provide them. Online banks can often offer higher interest rates than national, traditional banks because they have less overhead.

When choosing a high-yield savings account, it's important to look beyond the advertised rate and consider how you plan to use the account and how you prefer to bank. For example, if you prefer to bank in person, an online-only bank may not be the best option. It's also essential to compare rates, as the term "high-yield" can mean different things to different banks.

Some of the best high-yield savings accounts as of October 2024 include:

• Capital One 360 Performance Savings Account
• EverBank Performance Savings Account
• Marcus by Goldman Sachs High-Yield Online Savings Account
• Varo Savings Account
• ETRADE Premium Savings Account
• UFB Portfolio Savings
• American Express High Yield Savings Account
• Laurel Road High Yield Savings Account
• Quontic Bank High Yield Savings Account
• SoFi Checking and Savings Account

Money market accounts

• Interest Rates: Money market accounts typically offer higher interest rates compared to traditional savings accounts, ranging from 4.00% to 5.50% APY. These rates are variable and can fluctuate with the market.
• Accessibility: Money market accounts provide easy access to funds, often allowing unlimited in-person and ATM withdrawals. However, there may be limits on the number of checks that can be written each month and restrictions on monthly debit card transactions and electronic transfers.
• Minimum Balance Requirements: Money market accounts usually have higher minimum balance requirements than traditional savings accounts. Failing to maintain the minimum balance may result in fees.
• Transaction Limits: There are typically monthly limits on certain types of withdrawals and transfers. Exceeding these limits may result in additional fees.
• Fees: Money market accounts may charge various fees, such as monthly maintenance fees or excess withdrawal fees if the account balance falls below the minimum requirement.
• Suitability: Money market accounts are well-suited for short-term savings goals, emergency funds, and specific purchases. They are not intended for long-term financial planning, such as retirement.
• Comparison with Other Accounts: Money market accounts offer higher interest rates than regular savings accounts and provide more flexibility in accessing funds compared to certificates of deposit (CDs). However, they may have more restrictions than regular checking accounts, which typically allow unlimited transactions.

Short-term bond funds

• SPDR Portfolio Short-Term Corporate Bond ETF (SPSB)
• IShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
• Schwab 1-5 Year Corporate Bond ETF (SCHJ)
• Vanguard Short-Term Bond ETF (BSV)
• Fidelity Short-Term Bond Fund (FSHBX)

While short-term bond funds are not risk-free, they are safer than investing in high-yield bonds or the stock market. If you are looking for yields with even less risk, you might consider money market funds.

Cash management accounts

A cash management account (CMA) is a non-bank cash account that combines the features of a checking account, savings account, and/or investment account. They are typically offered by non-bank financial service providers, such as investment advisory firms or broker-dealers, and provide high-interest rates and low fees. CMAs are a good option for those looking for a liquid cash account that allows quick access to their money.

CMAs are not a banking product, and the specific features of an account will vary depending on the financial institution. Some CMAs offer check-writing privileges, ATM access, debit cards, and online payment services. Others include a brokerage component, allowing you to transfer money directly into investment accounts.

When you fund your CMA, your provider will move your money into accounts at its program banks, usually at the end of each business day. It is at these banks where your money earns interest and receives FDIC insurance protection.

Pros and cons of cash management accounts

A potential benefit of a CMA is a simplified banking experience, as you can combine the features of an interest-earning savings account with a traditional checking account. CMAs can also help you maximise your cash by earning interest on money that would otherwise be sitting in a non-interest-bearing account.

On the other hand, CMAs may charge monthly maintenance fees or require a minimum monthly balance. You may also have to pay fees to transfer money out of your CMA or even to close the account. While CMAs offer competitive interest rates, there may be online savings accounts that offer higher rates.

If you are a fan of online banking, a CMA might be a good option, as it provides similar features and allows you to consolidate your savings, checking, and investing into one account. However, if you prefer face-to-face customer service, a CMA might not be the best option, as these accounts are typically managed online.

Before opening a CMA, it is important to evaluate the features and fees of the account and consider whether it aligns with your financial goals. Some people prefer to maintain separate accounts for savings, checking, and investing as part of their savings strategy.

Government bonds

Short-term government bonds are an excellent choice for investors with short-term goals. These bonds typically have maturities of less than five years and are less sensitive to changes in interest rates compared to longer-term bonds. This means that investors won't lose as much if interest rates increase.

Some examples of short-term government bond funds include:

• Vanguard Short-Term Bond ETF (BSV)
• SPDR Portfolio Short-Term Corporate Bond ETF (SPSB)
• IShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB)
• Schwab 1-5 Year Corporate Bond ETF (SCHJ)

These funds offer exposure to US government and corporate bonds with maturities of up to five years. They provide a stable investment option with relatively low risk and the potential for decent returns.

When deciding whether to invest in short-term government bonds, it is important to consider your investment goals, risk tolerance, and the overall asset mix of your portfolio. While short-term government bonds offer stability and income, they may not provide the same high returns as riskier investments.

Frequently asked questions