As good as the investment environment has been for stocks in the past few years, it has been very much the opposite when it comes to short-term investments, primarily those paying interest and offering safety of principal.
In truth, there really aren’t a whole lot of places you can invest your money in relatively high income, risk-free securities. At almost every turn, you’re forced to make a trade-off between safety and higher yields.
We’re going to look at a variety of short-term, primarily interest-bearing investments. Only a couple will return anything close to what the stock market can, and we’ll try to balance somewhat higher returns with at least relative safety of principal.
Here are the top 15 best short-term investments that money can buy – right now.
1. Pay Off Debt – Especially Credit Cards
One of the very few ways to get double-digit returns in a completely safe investment is to payoff credit card debts. Since credit cards typically charge annual rates in excess of 10% you can effectively lock-in that return by paying off the cards.
One thing you won’t have by paying off credit cards is a pile of cash sitting someplace where you can use it anytime. However, you will have fully available credit lines, and that will enable you to tap funds anytime you need them. And as long as you don’t, it will be the equivalent of earning double-digit returns on your money. (See Also – Make Yourself Recession-Proof: Eliminate Debt)
2. A Bank Savings Account or Money Market Account
Both of these account types pay an interest rate that is some small fraction of 1%. And while those returns are completely awful, two things that you will have in your favor are absolute safety of principal, and complete liquidity.
Sure, there are a lot of other more remote interest-bearing investments that offer higher returns, but there’s something to be said for being able to walk into your local bank branch and withdrawing your money anytime you need it. That’s liquidity of the highest kind and that has a value beyond yield.
Need a high yield savings account? You might want to take a look at EverBank
3. Certificates of Deposit (CDs)
CDs pay higher rates of return than bank savings accounts and money market funds, but not by much. Still they will pay at least a little bit more, and that’s a perfect way to earn a little bit of extra money on funds that you have no immediate need for.
You can set up CDs to mature in terms of anywhere from 90 days to 10 years, so this will offer you an ability to ladder the securities based on your anticipated needs. The disadvantage is that if you pull the money out before the certificate matures, you’ll have to pay an early withdrawal penalty.
4. Treasury Bills
These are short-term government securities with maturities ranging from a few days to 52 weeks. Bills are sold at a discount from their face value, which is what you collect when they mature. You can purchase them the denominations as small as $100 through the US government’s Treasury Direct web portal, and hold them there as well.
The interest on these tends to be even lower than what they are on certificates of deposit. That’s because US Treasury securities are widely considered to be the safest debt securities in the world.
If you’re looking for absolute safety of principal, as well as complete liquidity, there’s no better place than Treasury Bills for your money. In fact when institutions talk about “holding cash”, T-Bills are often what they’re talking about.
One more important point about Treasury securities of all types – they are exempt from state and local income taxes.
5. Treasury Notes
Treasury Notes are the longer-term variation of Treasury Bills. They earn a fixed rate of interest every six months until maturity. Notes are issued in terms of 2, 3, 5, 7, and 10 years. They can also be purchased and stored with Treasury Direct, in denominations as low as $100.
They are much like certificates of deposit in that they are excellent for holding money for longer periods of time. Unfortunately, interest rates aren’t much better than they are on shorter-term securities or on certificates of deposit.
Though they are for terms of as long as 10 years, you can always sell them whenever you like, as there’s a highly liquid market for them and no early withdrawal penalties.
6. Treasury Inflation Protected Securities (TIPS)
These are an inflation adjusted variation of Treasury securities. The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index. When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.
TIPS pay interest twice a year, at a fixed rate. The rate is applied to the adjusted principal; so, like the principal, interest payments rise with inflation and fall with deflation.
Like Treasury Bills and Notes, TIPS come in denominations of as little as $100, and can be purchased at and held through Treasury Direct. They are issued in terms of 5, 10, and 30 years.
You will probably want to hold them for the shortest term possible, which is five years, but the annual inflation adjustment will generally provide you with a better rate of return than you will get on other securities. And like Treasury Notes, you can always sell TIPS before they mature.
7. Cash In The Cookie Jar
No interest income, no FDIC insurance coverage – so why would you ever want to hold cash in the cookie jar (or the equivalent)?
Cash is the highest form of liquidity. Anytime you need access to it, you can simply go into your cookie jar – you don’t even need to leave home.
Also, if you’re concerned at all with the possibility of widespread bank closures, having cash saved at home will be an outstanding idea.
8. Online Checking and Savings Accounts
These days the best returns to be found on bank-type investments are with online checking and savings accounts. You can find such accounts that pay well above average rates of interest through Everbank, Ally Bank, and Capital One 360. On higher balances these banks pay close to 1% in interest.
They offer FDIC insurance, easy access to your money, and the only thing separating them from your friendly neighborhood bank is that they usually don’t have local bank branches.
9. Roth IRA
This isn’t as crazy as it sounds. Roth IRAs have even been suggested for use as emergency funds. Here’s why…
Since the contributions that you make to a Roth IRA are not tax-deductible when taken, you can also withdraw the money at any time without having to pay taxes or even an early withdrawal penalty on the amount of the contribution. Only the amount of investment income earned on the account is taxable, and if you were investing in short-term interest-bearing securities, the tax impact will be minimal.
You don’t want to use a Roth IRA as a cash in-and-out account as a general rule – it’s primary purpose is for retirement. Yet it does represent a place to park un-used cash that you can have access to in relatively short order. Just make sure that any money that you invest for short-term needs is held in relatively safe assets, such as the ones described in this article.
10. Online Bank CDs
There are online money market accounts available that pay rates above those that you can get your local bank. An excellent example is Everbank‘s MarketSafe CD. It can potentially earn higher rates of return than traditional certificates because it’s invested in five emerging market currencies that pay higher rates of return than what you would normally get in US banks.
Everbank describes the MarketSafeCD this way:
With a MarketSafe CD, your deposited principal is always secure. At CD maturity, that’s the least you’ll get back. Of course, that would only happen if the market (or reference index) it’s tied to loses ground over the CD term. Conversely, if the market performs well, you’ll earn a market upside payment on top of your principal. The actual rules governing how the upside payment is calculated may vary from CD to CD and are fully explained in each issue’s term sheet.
If that sounds a bit exotic, understand that you will have to invest with a bit of a twist if you want to get higher returns on fixed value investments. The MarketSafe CD is a way to do that.
11. Short-term Bond Funds
Bonds typically pay higher rates of interest than bank investments, however there is risk of loss of principal. Should interest rates rise, the value of the bonds will fall, causing you to lose some of your principal. You can get around this largely by putting your money into short-term bond funds.
These can be done through short-term bond mutual funds or exchange traded funds (ETFs), that generally hold bonds with a maturity of less than two years. The fact that the bonds come due so quickly minimizes the impact of rising rates, so your principal will be more secure than it will be with longer-term bonds.
12. Municipal Bonds
Municipal bonds typically run in the range of 20 years, which means that there’ll be considerably more risk to your principal should interest rates rise. But you won’t be looking to invest in long-term municipals, and that will minimize potential loss of principal.
You can still invest in any kind of long-term bond, you just have to make sure that the bonds are close to coming due. For example, if it’s a 20 year bond, you can buy them if they’re within two years of maturity.
Since they are so close to being paid off, holders of the bonds won’t dump them to avoid interest rate risk. And even if they do, you can simply hold until maturity when you will be fully reimbursed at face value of the bonds. You may even get a small capital gain if you buy them at below their face value.
Municipal bonds of course have the additional advantage that they are free from federal income tax. They are also free of income tax in the state where they are issued.
However, they will be taxable in non-issuing states, though the impact of that tax bite is generally minimal. If you live in a state that does not have an income tax, it won’t be a problem anyway.
13. Corporate Bonds
Like municipal bonds, corporate bonds can run 20 years or more, and also have risk of principal should rates rise. Once again, you’re not going to a buy a bond and hold it for 20 years. You’ll buy it within two years of maturity, and that will protect your principal.
Corporate bonds do not have FDIC insurance, and they are not guaranteed by federal or state governments. But they do typically pay higher rates of interest than bank assets or money market funds.
14. Long-term Treasury Bonds
Just as is the case with municipal and corporate bonds, you can also invest in long-term Treasury Bonds that are nearing maturity. Treasury Bonds can run as long as 30 years, and once again if you want protect your principal value, you should plan on buying them within no more than two years of maturity. That will give you the benefit of the higher interest rate that the bonds pay, but protect you from major price swings that can hurt your principal value.
You can buy Treasury Bonds through Treasury Direct in denominations as small as $100. For comparison sake, Treasury Bonds currently have a coupon rate of 3.00%, and an yield of 3.05%, which are pretty good rates on fixed income investments the days.
15. Lending Club
Lending Club is the most prominent member of platforms engaged in Peer-to-Peer Lending, or simply “P2P“. It is a web platform where borrowers and investors come together, and work out lending agreements while cutting out the middleman (banks and brokers). This generally leads to lower interest rates paid by borrowers, and higher interest rate returns for investors.
When you invest with Lending Club you’re actually stepping into the role as lender. You don’t invest in a single loan, but a portfolio of loans. To do this, you can take a small piece of 100 or more loans, with a stake of $25 or more in each loan. That will not only allow you to invest in many loans with a relatively small portfolio, but it will also shield you from the risk of default by any single borrower.
It would be possible to invest $10,000 in 200 different loans, at $50 each, and that’s some pretty solid diversification.
Many investors have been earning returns of over 10% through Lending Club. It is not a sub-prime lending platform, but it does accept a wide range of credit profiles for lending purposes. The loans are graded from A1 (highest rated loans) to G5 (lowest rated). As of September 30, 2014, A graded loans carry an average return of 7.64%, while G loans are at 24.9% You can choose any level of risk you’re comfortable assuming.
So there you have at least 15 short-term investments that represent a suitable place to park your money and often either achieve greater liquidity, or a higher rate of return than what you will get with your local bank.
￼What are some other good short term investments?