Short Term Means Days To Months
Sometimes money is freed up but has nowhere to go. For example, a large tax refund due to a mortgage deduction in the value of thousands suddenly arrives in your bank account. You would like to use this money soon to buy a car but not so soon that you want to keep it in a savings account that has almost no interest. In such situations it is useful to consider a short term investment vehicle to put the money temporarily up to a year.
The main requirement of a short term investment option is that it provides a stable return and that it may be quickly liquidated so the funds are made available to you immediately - meaning a few days at most. The stability requirement is needed because the investment is no use if in a few days it experiences a negative fluctuation so that you can no longer pull out the funds quickly.
Three Options
There are three standard possibilities for people in short term investment options. We describe them in the article below.
1. Certificate Of Deposit
A certificate of deposit or a CD is one of thsoe short term investment options which are available at plain vanilla banks. They are a promise by the bank to pay a certain interest rate for funds that you deposit for a fixed set of time. That time can be as short as three months. At the end of three months, you may pull out the money. If you pull it out before hand, two kinds of outcomes are expected depending on what kind of CD it was. If it was a penalty-free CD, then there are no fees associated with early termination of the CD. However, most CDs come with a small fee for ending it before the life of the CD. That fee can be some 5% of the total value of the CD. Here is a list of best CD rates for short term investments to get you started.
2. Short Term Bond Fund
A short term bond fund is a type of financial product available at brokerages such as Fidelity or Vanguard. Because the underlying securities of a short term bond fund (encompassing municipal, state, federal and corporate bonds) have very short life times, on the order of days to months, they tend to be very stable with slow but steady growth rates. These rates tend to also be higher than anything you can get in a savings account at a bank or even a CD. The only downside is that the rate of growth has a tendency to fluctuate, although it will almost always be positive or at least unchanging. Take a look at this article for a warning on bonds as short term investment options.
3. Money Market Fund
Also offered by brokerage firms, the money market fund is very similar to a short term bond fund in that all the underlying securities have short life times on the order of days to months (3 months or 90 days at most in the majority of money market funds). We have a good discussion on our very own site of what are money market fund. The bottom line is that these funds are very stable, growing at slow but steady rates. In fact, they tend to fluctuate even less than short term bond funds. This site has rates for money market short term investment options.
Start Here
These three types of investment vehicles are a good place to get started if you're in a hurry to put your money somewhere. But your particular brokerage will have other financial products that serve similar purposes that satisfy the two requirements of good short term investment options: stability and liquidity.