Short-Term Investment Strategies: Where To Park Your Money

Short-term investments are financial instruments with a maturity period of five years or less. They are a great way to preserve capital and generate modest returns. Some of the best options for short-term investments include high-yield savings accounts, money market accounts, certificates of deposit (CDs), short-term bond funds, and treasury bills. These investments offer liquidity, low fees, and moderate returns, making them ideal for those with near-term financial goals or a low-risk tolerance.

High-yield savings accounts

You can typically earn much higher interest rates at online banks than at national, brick-and-mortar banks. You can also usually access your money quickly by transferring it to your primary bank or via an ATM.

Savings accounts are highly liquid, and you can add money to the account. However, savings accounts typically only allow for up to six fee-free withdrawals or transfers per statement cycle.

When choosing a high-yield savings account, watch out for banks that charge fees for maintaining the account or accessing ATMs. It's also worth noting that interest rates are currently higher than they've been in some time, thanks to the Federal Reserve's ongoing fight against inflation.

Money market accounts

Overall, money market accounts are a good option for those seeking a safe and accessible place to store their money in the short term while earning a higher interest rate than a regular savings account.

Short-term bond funds

When investing in short-term bond funds, investors earn a yield, which measures the income produced by the bonds in the portfolio relative to the current market price.

• SPDR Portfolio Short-Term Corporate Bond ETF (SPSB): This fund offers exposure to US corporate bonds with maturities between one and three years. It has an SEC yield of 4.33% and an expense ratio of 0.04%.
• IShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB): This fund holds bonds issued by major companies, including Bank of America, JPMorgan Chase, and Microsoft. It has an SEC yield of 4.38% and an expense ratio of 0.04%.
• Schwab 1-5 Year Corporate Bond ETF (SCHJ): This fund holds corporate bonds with remaining maturities between one and five years. It has an SEC yield of 4.34% and an expense ratio of 0.03%.
• Vanguard Short-Term Bond ETF (BSV): This fund holds government bonds, high-quality corporate bonds, and investment-grade international dollar-denominated bonds. It has an SEC yield of 3.84% and an expense ratio of 0.04%.
• Fidelity Short-Term Bond Fund (FSHBX): This fund typically invests at least 80% of its assets in investment-grade debt and maintains a dollar-weighted average maturity of three years or less. It has an SEC yield of 4.23% and an expense ratio of 0.30%.

While short-term bond funds are not risk-free, they are safer than investing in high-yield bonds or the stock market. For those looking for even less risk, money market funds could be a good option.

Certificates of deposit (CDs)

CDs are federally insured for $250,000 per depositor per bank, meaning your cash is safe up to that limit. CDs differ from high-yield savings, however, in that they're not as accessible. Traditional CDs lock up your money for a specified amount of time, but the key is that you pick how long, so you know what to expect. CD term lengths vary, typically ranging between three months and five years, and usually, the longer the term, the higher the fixed interest rate offered.

CDs can be good vehicles for short-term investments because, in a high-interest-rate environment, they allow you to lock in a good rate for, say, three years, at which point you may plan to be ready to buy a house. With a CD, you make a one-time deposit when you open the account and don't keep contributing to it like you do with a savings account until the CD term length is up.

If you feel that you need greater access to your cash or don't necessarily want to commit to locking it up, you can go with a no-penalty CD, which allows for easy withdrawals cost-free (just make sure the rate offered is worth it).

CDs are one of the safest savings vehicles as your money is federally insured. They are generally a good investment. Your money grows without the risk of your rate dropping (which can happen with a high-yield savings account), and you're guaranteed a return without worrying about stock market volatility.

However, CDs are designed for holding money that you don't plan to spend right away. While you aren't barred from taking money out of a CD early, there's usually a price to pay for doing so. Banks and credit unions often charge an early withdrawal penalty for taking funds from a CD ahead of its maturity date. This penalty can be a flat fee or a percentage of the interest earned. In some cases, it could even be all the interest earned, negating your efforts to use a CD for savings.

Treasury bills

T-bills are issued at a discount from their face value, meaning that investors pay less than the face value when purchasing the bill and receive the full face value upon maturity. The difference between the purchase price and the maturity value is the interest earned by the investor. For example, if an investor purchases a $1,000 52-week T-bill for $954.19, they will earn $45.80 in interest when the T-bill matures at $1,000.

T-bills can be purchased directly from the US government through TreasuryDirect.gov or from brokerage firms like Fidelity and Charles Schwab. When buying through TreasuryDirect, investors need to provide their Social Security number or taxpayer identification number, a US address, and checking or savings account details.

While T-bills offer a stable income with low minimum investment requirements, they also have some drawbacks. They offer low returns compared to other debt instruments and do not pay periodic interest. Additionally, T-bills can inhibit cash flow for investors who require steady income, and they have interest rate risk, which means their rate can become less attractive in a rising-rate environment.

Overall, T-bills are a good option for investors seeking a safe and secure investment with a short-term maturity while parking their money for a brief period.

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