Types of Short-Term Investments

Take the time to evaluate types of short-term investments if you are preparing to retire or planning a large purchase, like a home, and you don't want to tie up your money for too long. That way, you can still earn some interest on what you are saving.

Savings Accounts: The Least Profitable Type of Short-Term Investments
Savings accounts are the most simple, liquid types of short-term investments, but in return for being easy to access, they offer low yields. Most savings accounts don't even keep up with inflation, so they're useful for short-term savings but should not be used to store money over time. Online savings accounts offer a slightly higher yield than traditional bricks-and-mortar banks, but neither is a good choice for substantial short-term savings.

Certificates of Deposit: A Common Option
Certificates of Deposit, or CDs, are one of the most common types of short-term investments. When you put your money into a CD, you agree not to withdraw it for a set period of time in return for a higher yield. CD lengths range from as little as three months to as long as five years. CDs are federally insured, so they're one of the safest types of short-term investments, and yet they still offer a reasonable yield. However, if you withdraw money from a CD prior to the maturity date, you'll face penalties, so think about when you think you'll need the money.

Money Market Funds: Higher Risk, but Potentially Higher Profit
Money market funds are typically liquid like savings accounts, but they offer a better yield. The downside of most money market funds is that they are not federally insured, unlike other types of short-term investments. This makes money market funds a higher-risk vehicle for short-term savings. When considering money market funds, ask yourself whether or not you can afford to lose the investment and whether you find the risk tolerable for the potential yield.

Don't Confuse Money Market Funds With Money Market Deposit Accounts
Money market deposit accounts offer another option for short-term savings. Money market deposit accounts may be more desirable than money market funds, as they are federally insured, but the return is typically lower than that of money market funds. Additionally, money market deposit accounts limit the number of transactions you can make per month and charge penalties for falling below a minimum balance.

Treasury Bills and Bonds: Some Security for the Short Term
Treasury bills can be more secure types of short-term investments, and they provide flexible short-term investment terms of 4 weeks to one year. However, because they're designed for short-term savings, treasury bills offer an extremely low yield. Bonds offer slightly more flexibility, but they may be less secure for short-term savings than treasury bills. If you purchase corporate bonds, you assume the risk that the corporation could declare bankruptcy and you may not get your investment back. However, secured bonds can give you more reassurance that your short-term savings aren't going to be lost.

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