More significantly, there’s a trade-off on the liquidity front: You’ll usually pay a penalty if you need to crack into your holdings before the maturity date.
One is that minimum deposits for the highest-yielding CDs might be $25,000 or even higher. Five-year CDs on were recently yielding up to 4.5%, and two-year CDs were paying out 4.3% to 4.8% per year. Surveying the Field of Short-Term InvestmentsĬertificates of Deposit: CDs will typically offer the most compelling yields of all cash instruments, and they’re also FDIC-insured. Money market mutual funds aren’t FDIC-insured. On the shortlist of FDIC-insured investments are checking and savings accounts, CDs, money market accounts (not to be confused with money market mutual funds), and online savings accounts. FDIC-insured accounts provide the assurance that you’ll be made whole if your account has a loss FDIC insurance covers up to $250,000 per depositor per institution. Some cash instruments are fully FDIC-insured (up to the limits), while others are not. Guarantees: Also take a moment to think through whether you value an ironclad guarantee or are willing to go without in exchange for a potentially higher yield. Banks will pay you more for the certainty of knowing that your funds will be there for a specific period of time than they will if you could pull your cash at any time. Liquidity: Liquidity constraints are another differentiator among cash holdings: If you're willing to tie up your money with a financial institution for a predetermined period of time-as is the case with certificates of deposit-you'll usually be able to earn a higher return than if you'd like to have ready access to your cash. Additionally, that very high yield may only apply to balances under a certain level, often as low as $15,000, and you'll earn less if you hold more than that. Attractive "teaser" rates may also apply to the first few months you hold the account but drop after that.
The accounts with the highest yields typically require you to maintain a minimum balance. Yield: While it's tempting to park your short-term investments in whatever is offering the highest yield right now, be sure to read the fine print. Or maybe having ready access to your funds-because you’re using the money as your emergency fund-is the name of the game. It may be that you’re just looking for the highest safe yield and don’t care that much about liquidity. The short-term investments that promise the highest yields often come with at least some level of risk and/or constraints on your daily access to funds. The Best Short-Term Investments: What Matters Most?Īs you sift among the various options for your short-term investments, keep three key items on your dashboard: yield, guarantees, and liquidity, and what matters the most given your situation. For retirees, I like the idea of maintaining a cushion of one to two years’ worth of portfolio withdrawals in liquid reserves that way you don’t have to sweat losses in your stock and bond portfolios or risk having to sell them when they’re down. But everyone needs an emergency cushion equal to three to six months’ worth of basic living expenses, at the low end. Even with higher yields coming online, cash is still a losing proposition given that rising prices gobble up every bit of the purchasing power of your cash yields. Of course, it’s a mistake to overdo cash holdings, especially with inflation that has only somewhat cooled in recent months. certificates of deposit, money market funds, and other cashlike assets are finally generating attractive yields for the first time in decades. Thanks to the Federal Reserve’s campaign of rate increases, once-miserly yields on cash instruments have made a significant turnaround.
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