Short-Term Investments to Explore Moving Into 2023

Nov 28, 2022

7

min read

T

he current economic situation makes investing seem not so favorable due to decade-high inflation, unstable markets, and worries about a recession. Additionally, you might hear the experts suggesting that you save money in emergency funds and stack up cash. But as they say, cash is trash; it's a terrible idea to hoard it since the inflation monster gobbles up the dollar's purchasing power.

In this light, short-term investments are a great option to protect your savings against inflation while still getting a decent return on your money. They also work as a cushion for emergencies, so you won't have to worry about selling low-performing stocks or bonds to cover short-term expenses.

This article will discuss the short-term investments to consider in 2023 and will address the what, why, where, and who questions related to them so that you can choose the investments that are right for you. So, let's dig in.

High-Yield Savings Accounts

After cash, savings accounts are the safest and most liquid investment option. But regular savings accounts don't pay much interest. Thus, you can opt for high-yield savings accounts that pay you more.

What are High Yield Savings Accounts?

High Yield Savings Accounts are saving accounts, generally offered by online banks and credit unions, that offer higher interest than regular saving accounts. In simple terms, it's a fusion of traditional savings accounts and fixed deposits, allowing you to earn high interest without depositing the amount for a specified period.

These accounts' annual percentage yield (APY) is twenty to twenty-five times the standard savings account rate. Presently, most high-yield savings accounts give more than 3% APY, whereas the national average is just 0.24%.

Why Should You Invest in High-Yield Savings Accounts?

Here are some pros of investing in high-yield savings accounts:

They offer higher rates than regular savings accounts.
Most banks do not charge monthly, maintenance, or transfer fees.
You can easily access your funds as money can be withdrawn whenever you need.
The high-yield savings accounts are insured by the Federal Deposit Insurance Cooperation (FDIC) at banks and the National Credit Union Administration (NCUA) at credit unions. If a bank fails to pay your deposit, FDIC or NCUA will reimburse your deposit amount so that you don't lose your hard-earned money.

Why Shouldn't You Invest in High-Yield Savings Accounts?

Here are some cons of investing in High-yield saving accounts:

The interest rate on the account is variable and, thus, can fluctuate with the market rates. So, just because the account is paying high now does not mean it will pay the same later.
Most banks offering high-yield savings accounts don't have a physical presence. Additionally, some do not accept cash deposits or offer ATM access.
While you can easily access your funds when needed, some banks impose withdrawal limits up to six times a month. You need to pay a withdrawal or penalty fee or even close your account if you withdraw more than the limit.

Who Are They Best For?

High-yield accounts are best for you if you are a risk-averse investor who wants to deposit money in a secure place with a comparatively higher return than savings accounts.

Where To Get Them?

Online banks and credit unions offer high-yield saving accounts. Check out this article for The Best High Yield Savings Accounts For December 2022

Short-Term Corporate Bond Funds

With the interest rate volatility, you might be reluctant to invest in bonds. That's because bonds and interest rates have an inverse relationship. The prices of existing bonds go down when the interest rate rises, thus impacting the profitability and liquidity of the bond. But, consider investing in short-term bonds with lower interest rates and credit risk.

What are Short-Term Corporate Bond Funds?

Short-term corporate bond funds are a type of mutual fund that invests in corporate bonds issued by several companies. These corporate bonds are issued for one to five years. Since the fund has a portfolio of different corporate bonds, this helps diversify the risk and maximizes returns.

Why Should You Invest in Short-Term Corporate Bond Funds?

Here are the pros of investing in short-term corporate bond funds:

It has less credit risk and interest rate risk.
It is highly liquid, as you can buy and sell bonds whenever financial markets are open.
It helps diversify the risk, so if one company does not work well, it won't hamper your overall earnings.
You can enjoy a fixed return rate as the market changes won't affect your earnings.

Why Shouldn't You Invest in Short-Term Corporate Bond Funds?

Here are the cons of investing in short-term corporate bond funds:

They are not insured, so you can lose your money if the company goes bankrupt.

Who Are They Best For?

Short-term corporate bonds are best for investors who want to diversify their portfolios without analyzing individual bonds.

Where To Get Them?

You can purchase them from any online broker that offers ETF and mutual funds. Check out Charles Schwab, Fidelity and Vanguard to understand their programs and find if it is a good fit for you.

Money Market Accounts

Most savings accounts don't offer check-writing and debit card privileges. Money market accounts can be a great option if you are looking for accounts offering these privileges with higher interest rates.

What Is Money Market Account?

Money market accounts are a type of savings account offered by banks and credit unions that pay higher interest rates than regular saving accounts and often include check writing and debit card privileges. Usually, a bank requires a minimum initial deposit and balance to maintain the account.

Why Should You Invest in Money Market Accounts?

Here are some pros of investing in money market accounts:

It offers higher interest rates than a regular savings account.
Check-writing and debit card privileges are not available with a savings account.
All deposits are FDIC insured, protecting your money against potential loss.
The money market account is highly liquid, as you can easily access your money when required.

Why Should You Invest in Money Market Accounts?

Here are some cons of investing in money market accounts:

Some banks may impose certain withdrawal restrictions.
It usually requires a certain amount of initial deposit.
Usually, these account requires a minimum balance to maintain the account.

Who Are They Best For?

They are suitable for earning high-interest rates in the short term. If you are hesitant to deposit money in a certificate of deposit but still want to make a decent return, then a money market account is best for you. Similarly, if you wish, check-writing and debit card privileges.

Where To Get Them?

You can open money market accounts at any bank or credit union. Here are some options for you to start exploring and planning, Navy Federal credit Union, Service Credit Union, Zynlo Bank, Brilliant Bank and Sallie Mae.

Cash Management Accounts

There are different banking accounts with various features. Wouldn't it be great to get all those features in one account? In this regard, you might look out for cash management accounts.

What Is Cash Management Account?

A cash management account combines the services of several banking products, such as saving, checking, and investment accounts, in one product. It helps you manage your day-to-day expenses as well as your long-term investments. This enables you to streamline your finances, allowing you to make a transaction without the need to transfer funds between several accounts.

Why Should You Invest in Cash Management Account?

Here are the pros of investing in a cash management account:

You can streamline all your money in one place, which makes it easy to manage your funds.
It offers higher interest rates than savings accounts.
The deposits are FDIC-insured.
Since your money is all in one place, you can invest it easily without transferring funds between the accounts.

Why Shouldn't You Invest in Cash Management Account?

Here are the cons of investing in a cash management account:

The accounts are usually online and have no physical presence.
Other financial products may have higher interest rates.

Who Are They Best For?

They are best for people with large cash that exceeds the FDIC limits. It is the best option if you have more than $250,000 in your savings account. Also, it can be ideal if you do most of your banking online.

Where To Get Them?

You can open cash management accounts from Robo-advisors and online stock brokers. New to Cash Management space? Worry not! We have some sites for you to check out and feel confident - Wealthfront, Betterment and Personal Capital.

Short-Term U.S. Government Bond Funds

If you are looking for low-risk investments, then there is no other safest investment option than short-term government bonds.

What is Short-Term U.S. Government Bond Fund?

Short-term U.S. government bond funds are mutual funds consisting of investments such as T-bonds and mortgage-backed securities from federal agencies. A government bond is the most secure bond and has no credit risk that most corporate bonds have. However, there is interest risk since the bond price decreases with the interest rate increase.

Why Should You Invest in Short-Term U.S. Government Bond Fund?

Here are the pros of investing in short-term U.S. government bond funds:

They are the safest since they do not have default risk.
The government bond is widely traded and exchanged in the securities market, thus ensuring the fund's liquidity.
Since the bond fund is short-term, the market interest rate volatility won't affect the bond much.

Why Shouldn't You Invest in Short-Term U.S. Government Bond Fund?

Here are the cons of investing in short-term U.S. government bond funds:

They have a comparatively lower rate of return than corporate bonds.

Who Are They Best For?

It is best for risk-averse investors who want to diversify their portfolios without analyzing individual bonds.

Where To Get Them?

You can purchase them from any online broker that offers ETF and mutual funds. See where you can sign up and start investing, Vanguard, Mutual Funds, Treasury Direct and Fidelity.

No Penalty Certificate of Deposit

Certificates of deposit (CD) are savings accounts where you deposit money for fixed terms and rates without withdrawing the amount for a specified period. The bank offers you a high-interest rate for this promise. But, sometimes, things happen, and you might need to use that money. In such cases, you must pay a penalty fee to withdraw the amount. So, if you want to invest in CDs that can be easily withdrawn when required, then no penalty certificate of deposit can be best for you.

No Penalty Certs — Source : Rawpixel.com (Freepik)

What is a No Penalty Certificate of Deposit?

No penalty certificate of deposit is a type of CD in which you don't need to pay the penalty for withdrawing the amount before maturity. This offers more flexibility to the CD while providing high-interest rates.

Why Should You Invest in No Penalty Certificate of Deposit?

Here are the pros of investing in a no-penalty certificate of deposit:

It offers high APY than regular saving accounts.
The interest rate is fixed, so the changing interest rate won't affect your earnings.
Since there is no penalty for the withdrawal before maturity, you can withdraw the amount whenever you need.

Why Shouldn't You Invest in No Penalty Certificate of Deposit?

Here are the cons of investing in a no-penalty certificate of deposit:

It offers a comparatively lower interest rate than the CD.
Some banks might not allow you to withdraw partially. You have to withdraw the full amount and close the account after that.

Who Are They Best For?

If you want to ensure the liquidity of your funds while earning better returns than the savings account, penalty CDs are the best option. Also, they are the best investments when the interest rate is rising. This way, you can withdraw the money before maturity to lock in the high-interest rate and enjoy a high return.

Where To Get Them?

You can open a non-penalty certificate of deposit from the bank.

Also read: Expense Management And Investing Guide For Teenagers

Treasury Securities

If you want risk-free investments to park your money in the short term, then treasury securities can be your safest bet.

What Is Treasury Securities?

Treasury securities, including T-bills, T-notes, and T-bonds, are debt obligations issued by the U.S. treasury department to finance government spending. These investments are considered risk-free since the government backs them up.

Why Should You Invest in Treasury Securities?

Here are the pros of investing in Treasury Securities:

They are backed by the government and are regarded as risk-free investments.
You can quickly sell the securities in the securities market, thus ensuring liquidity.

Why Shouldn't You Invest in Treasury Securities?

Here are the cons of investing in Treasury Securities:

They are not inflation resistant due to their lower return.
The interest rate fluctuates according to changes in market rates, thus posing interest risk.
They also have the opportunity risk as the amount invested in treasury securities might earn a better return if invested elsewhere.

Who Are They Best For?

Treasury securities are ideal for those who want to invest without risk. Besides this, they may be a safe way to diversify your portfolio alongside risky assets.

Where To Get Them?

You can purchase them at TreasuryDirect.gov. Alternatively, you can also buy them from any bank or broker.

Money Market Mutual Funds

If you want to invest in liquid assets with low risk and good returns, then money market mutual funds are just right for you. Also, note that money market mutual funds and money market accounts are different short-term investments.

What Is Money Market Mutual Funds?

Money market mutual funds are mutual funds that invest in high-quality, short-term debt instruments, cash, and cash equivalents. The money market may invest in Banker's acceptances (B.A.), Certificates of deposits (CD), Commercial paper and Repurchase agreements, and U.S. treasury bills.

Why Should You Invest in Money Market Mutual Funds?

Here are the pros of investing in money market mutual funds:

They are low-risk since they invest in low-risk short-term debt instruments.
Since money market mutual funds invest in short-term debt instruments, they are liquid, and you can buy and sell them quickly.
They have a better return than the bank account.

Why Shouldn't You Invest in Money Market Mutual Funds?

Here are the cons of investing in money market mutual funds:

They are sensitive to interest rate fluctuations and monetary policy, thus affecting their rate of return.
FDIC does not cover them; therefore, there is default risk.
They are not inflation resistant.

Who Are They Best For?

The money market is a great place to park your money during times of high stock market volatility and uncertainty. Even in a bear market, the money market may still appeal due to its decent returns.

Where To Get Them?

You can purchase them from online brokers : Marcus, Fidelity, Vanguard and Gabelli.

Conclusion

Short-term investments are a great option to park your cash for a short period while earning a decent return on your investment. They are also best for reaching short-term financial goals such as buying a new house, wedding expenses, or emergency funds. With the current economic climate, you might be reluctant to invest and look for ways to save money from the decade-high inflation rates. There are various short-term investments, such as high-yield savings accounts, money market mutual funds, penalty-free certificates of deposit, and less risky treasury securities, which provide decent returns and are easily accessible when required. However, before choosing any investment, you must consider your financial goal and the risk you are willing to take.

Also read: 2022 Income Investment And Savings Options