When considering short-term investments, there are three key items to keep in mind: yield, liquidity, and guarantees. The accounts with the highest yields typically require maintaining a minimum balance. “Teaser” rates may apply to the first few months but drop after that. Additionally, that high yield may only apply to balances under a certain level, and you’ll earn less if you hold more than that.
Surveying the Field of Short-Term Investments
Certificates of deposit (CDs) will typically offer the most compelling yields of all cash instruments, and they’re also FDIC-insured. There are caveats: Minimum deposits for the highest-yielding CDs might be $25,000 or higher. You’ll usually pay a penalty if you need to access your holdings before the maturity date. The longer the term of the CD, the bigger the penalty. Banks offer “no-penalty CDs,” but yields are substantially lower.
Online savings accounts offer daily liquidity, a decent yield, and 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 the National Credit Union Administration. Minimum investment amounts tend to be lower than those for CDs, but there may be requirements to maintain a minimum balance.
Money market mutual funds offer daily liquidity and the convenience of being side by side with your long-term investments. But money market fund yields are generally below those of online savings accounts today. Additionally, they aren’t FDIC-insured, though in practice most funds have done an excellent job of maintaining stable net asset values.
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. The inflation adjustment is made twice a year.
Original reporting: KTBS 3 (Shreveport) — read the source article.
