Best Short Term Investment Options and Their Risks
Money often needs to be stored for relatively short periods of time. There are many reasons: preparing for an emergency, anticipating an upcoming expenditure, or waiting for better investment opportunities. There are many vehicles that can hold money during these intervals, each with a range of advantages related to risk, return and liquidity.
- Checking accounts: Because they are designed for ease of withdrawal and deposit, checking accounts pay nearly no interest. They are not recommended for storing any money that will not be used in near-term transactions, but they are extremely convenient for writing and depositing checks, accessing ATMs and arranging for automatic transactions like bill paying. Some checking accounts require fees and minimum balances, so they should be researched before they are opened.
- Savings accounts: Although they provide higher returns than checking accounts, savings accounts still offer very low returns. They are a safe place to store money temporarily and can often be used in tandem with checking accounts to manage basic personal finances.
- Money market accounts: Money market accounts offer many of the same services as checking accounts although transactions may be somewhat more limited. They are usually managed by banks or brokerages, so they can be a convenient place to store money that is earmarked for upcoming investments or has recently been received from the sale of an investment. Returns remain fairly low with these accounts.
- Money market funds: Money market funds are very liquid investments that offer marginally higher returns than the previously mentioned options. They are often managed by brokerages and used to store money that is not currently invested. Unlike bank accounts and money market accounts, deposits are not FDIC insured , but the risk is extremely low.
- Certificates of Deposit: CDs offer higher rates of return in exchange for tying up invested money for the duration of the certificate's maturity. Money removed before maturity is subject to a penalty. CDs are very safe investments, and most are FDIC insured.
- Treasury Securities: There are also a variety of Treasury securities and bonds that can offer modest returns and high liquidity for short-term storage.