Short-term investments are one of the simplest ways to save money. With low risk and little effort, this is an excellent way for many people to invest their cash. There are different types of short-term investments available, including CDs (certificates of deposit), high yield savings accounts, government bonds, treasury bills, and money market accounts.
CDs (certificates of deposit) are perhaps the most popular type of savings account among people who want to earn interest on their money or don’t need it immediately. A CD is essentially a loan that must be repaid in full after a specific time (usually three months or one year). The bank pays interest on this loan every month until the CD matures.
Money market accounts are like savings but typically offer higher interest rates and lower fees than standard savings plans. This type of account works similarly to a checking account except you can deposit or withdraw money from a money market account up to three times per month. Money market accounts have shallow risk and fluctuate with the economy so they’re a wise investment for those who don’t need their cash immediately. Unlike CDs, which maintain a constant value, money market accounts will vary in importance as the stock market changes. However, many online banks do not offer this service. Be sure to check your bank’s policy before opening an account.
Money market mutual funds are short term investment options similar to money market accounts but more difficult for the average person to access. These funds invest in various types of stocks and securities. However, like money market accounts, their value will vary depending on how well or poorly the stock market is doing on any given day.
Government bonds are low-risk securities issued by the U.S. Treasury Department at three different lengths: short term (1 year), mid-term (2 to 3 years), and long term (10 to 20 years). While you won’t be able to withdraw your money early from this type of investment without paying the penalty, you’ll receive slightly higher interest rates than with CDs or money markets because of the added risk of holding onto longer-term loans during recessions.
Treasury bills are similar to CDs, but there are no long-term commitments or minimums. You can open an account with as little as $100 and increase your deposit amount any time. However, this type of investment typically earns less interest than CDs do. The government uses these loans to fund projects that will strengthen the economy’s infrastructure without burdening other taxpayers.
Accounts that don’t fall into these categories—stocks, mutual funds, index funds, hedge funds, commodities, etc.—are considered alternative investments.
These investments involve much higher levels of risk (because you’re essentially investing in companies), so they aren’t recommended for someone looking for a simple way to save money. While putting your cash into these types of investments could make you a lot of money, the chances are much greater that your account will lose value.
It would be best if you took some time to think about how soon you need to access the cash in your account. If you need it within three months (and definitely won’t need it for rent), you probably don’t want to put it into an investment like CDs or money market accounts where there’s little chance that its value will increase. Some people prefer investing their money via online savings accounts because they’re more flexible than other options and often have higher interest rates. However, these investments are still low risk so long as you keep at least $250 in them at all times so they remain insured by the Federal Deposit Insurance Corporation.
If you need to save your money for the long term, it might be best to go with a CD or government bond. This will give you some peace of mind that your investment is safe and guaranteed not to drop in value. That’s not something you can always say about stocks or other forms of short-term investments.
Getting started is easy. Open an account online at an online bank and immediately begin earning interest on your deposits. You won’t have to worry about checking balances or transferring funds because everything will happen automatically through their straightforward online banking systems.