As you for , keep three key items in mind.
Surveying the Field of Short-Term Investments
Certificates of deposit
鈥痺ill typically offer the most compelling yields of all cash instruments, and they鈥檙e also FDIC-insured.
There are caveats: Minimum deposits for the highest-yielding CDs might be $25,000 or higher. You鈥檒l usually pay a penalty if you need to crack into your holdings before the maturity date. The longer the term of the CD, the bigger the penalty. Banks offer 鈥渘o-penalty CDs,鈥� but yields are substantially lower.
Retirees or others with ongoing cash flow needs can employ a laddered CD strategy, purchasing CDs of varying maturities. For emergency reserves, however, CDs will be less appropriate because withdrawals are apt to be unplanned and could trigger penalties.
Online savings accounts
If you want 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
Money market mutual funds, from providers like Fidelity, Schwab, and Vanguard, 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鈥檛 FDIC-insured, though in practice most funds have done an excellent job of maintaining stable net asset values.
Don鈥檛 confuse money market mutual funds with brokerage sweep accounts. Interest rates on sweep accounts, which hold investors鈥� cash that hasn鈥檛 yet been invested, have ticked up recently but are still well below other cash options.
Stable-value funds
Stable-value funds, only accessible inside company retirement plans, offer an often-decent yield in exchange for not checking the liquidity and guarantee boxes. They invest in bonds, so they鈥檙e not FDIC-insured; to protect investors鈥� principal, they employ insurance wrappers to help maintain a stable net asset value.
There are drawbacks: First, because you can only own such a fund within a鈥� , you鈥檒l pay taxes and penalties to withdraw your money before retirement unless you meet certain criteria. So don鈥檛 think of a stable-value fund as an emergency fund unless you鈥檙e already retired or close to it. Second, the assets aren鈥檛 guaranteed or eligible for FDIC protection.
Honorable mention: I Bonds
In contrast with the preceding investment types, the income from which will be gobbled up by inflation,鈥� 鈥痑re 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.
The downsides: First, I bonds fail the liquidity test. If you redeem an I bond within five years of buying it, you鈥檒l forfeit three months of interest. Second, new I-bond purchases are restricted to $10,000 per year per Social Security number.
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This article was provided to The Associated Press by Morningstar. For more personal finance content, go to .
is director of personal finance and retirement planning for Morningstar and co-host of .
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