Thanks to the Federal Reserve’s campaign of rate increases in 2022 and 2023, once-miserly yields on cash instruments have made a significant turnaround. Certificates of deposit, money market funds, and other cashlike assets are finally generating attractive yields for the first time in decades.
Of course, it’s a mistake to overdo cash holdings, especially with inflation still looming. Even with higher yields coming online, rising prices gobble up a healthy share of the purchasing power of your cash yields. But everyone needs an emergency cushion equal to three to six months’ worth of basic living expenses, at the low end. For retirees, I like the idea of maintaining a cushion of one to two years’ worth of portfolio withdrawals in liquid reserves; that way you don’t have to sweat losses in your stock and bond portfolios or risk having to sell them when they’re down.
The Best Short-Term Investments: What Matters Most?
As you sift among the various options for your short-term investments, keep three key items on your dashboard: yield, guarantees, and liquidity, and what matters the most given your situation. The short-term investments that promise the highest yields often come with at least some level of risk and/or constraints on your daily access to funds. It may be that you’re just looking for the highest safe yield and don’t care that much about liquidity. Or maybe having ready access to your funds—because you’re using the money as your emergency fund—is the name of the game.
Yield: While it’s tempting to park your short-term investments in whatever is offering the highest yield right now, be sure to read the fine print. The accounts with the highest yields typically require you to maintain a minimum balance. Attractive “teaser” rates may also apply to the first few months you hold the account but drop after that. Additionally, that very high yield may only apply to balances under a certain level, often as low as $15,000, and you’ll earn less if you hold more than that.
Guarantees: Also take a moment to think through whether you value an ironclad guarantee or are willing to go without in exchange for a potentially higher yield. Some cash instruments are fully FDIC-insured (up to the limits), while others are not. FDIC-insured accounts provide the assurance that you’ll be made whole if your account has a loss; FDIC insurance covers up to $250,000 per depositor per institution. On the short list of FDIC-insured investments are checking and savings accounts, CDs, money market accounts (not to be confused with money market mutual funds), and online savings accounts. Money market mutual funds aren’t FDIC-insured, though money funds that invest in Treasury bonds are buying securities that are backed by the full faith and credit of the US government. […]
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