It's generally a good idea to maintain a diversified portfolio, including some cash, no matter one’s financial status. In fact, putting some funds into short-term savings can be an excellent way to protect oneself against market volatility and help set the stage for long-term financial success. It should be noted, however, that keeping excess money in a bank account isn’t usually an efficient way to grow it.
Fortunately, there are ways to possibly capitalize on higher rates in order to maximize the return potential of one’s investments. Below we’ve listed four places where one can consider parking their short-term cash to potentially secure attractive yields without sacrificing safety.
#1: High-Yield Savings Accounts
When one wants to protect their cash, a high-yield savings account is generally a safe place to store money. Unlike a traditional savings account, high-yield savings accounts usually offer interest rates of up to 0.50%, depending on the bank. They’re also federally insured up to $250,000 per depositor by the Federal Deposit Insurance Corporation (FDIC). In addition, one can generally access their funds in a high-yield savings account anytime they want without penalties, making it a potentially ideal option for short-term cash storage.
#2: Money Market Funds*
A money market fund is a low-risk investment option that can potentially yield higher returns than a savings account. These funds invest in short-term, liquid debt securities, such as treasury bonds and commercial paper. The average yield on a money market fund is about 0.10%, although one can sometimes find funds offering higher rates depending on the market. However, money market funds have a minimum investment requirement and may charge fund expenses.
#3: Short-Term Bond Funds**
If an individual wants to invest their short-term cash to earn higher returns than those offered by savings accounts and money market funds, they might consider short-term bond funds. These funds invest in bonds with maturities of three years or less, generally providing low volatility and high liquidity. Short-term bond funds can potentially generate returns of 2.50% to 3.00% per annum, depending on the fund. However, short-term bond funds carry more risks than savings accounts and money market funds (note that they aren’t FDIC insured, for example).
#4: Treasury Bills
Treasury bills can also potentially provide a safe and low-risk investment option for short-term cash. Short-term securities that are issued by the US government, with maturities ranging from four weeks to one year, T-bills generally offer interest rates that are higher than those of savings accounts and money market funds, depending on market changes. They are also usually exempt from state and local taxes, generally making them a more tax-efficient investment.
By investing short-term cash in high-yield savings accounts, money market funds, short-term bond funds, or treasury bills, one can potentially generate higher returns than traditional savings accounts while still keeping their money safe. However, one should always make sure that these options align with their investment goals, risk tolerance, and investment horizon before making any financial moves. Consulting with a trusted financial advisor before making any decisions can help one diversify their portfolio and possibly grow their wealth.
Disclosures: The content of this article is for educational and informational purposes only. Not all products or services mentioned are offered through Lincoln Financial Advisors. All investing is subject to risk, including the possible loss of the money you invest. The Federal Deposit Insurance Corporation (FDIC) is a U.S. government agency that insures cash deposits at FDIC member banks, generally up to $250,000. For more information, visit www.fdic.gov.
Prices of fixed-income securities may fluctuate due to interest rate changes, credit risk, and market changes. Investors may lose money if bonds are sold before maturity. U.S. Treasury bills are guaranteed as to the timely payment of principal and interest.
*An investment in a money market fund is not insured or guaranteed by the FDIC or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.
**Bond funds entail interest rate risk (as interest rates rise bond prices usually fall), the risk of issuer default, issuer credit risk, and inflation risk.