Short Term Investments
Annual Return (Sept. 2020)
0.50% - 1.00%
Some Investment Options
Certificates of Deposit (CDs): 0.50% - 1.00%
Certificates of deposit are a product offered by banks. You deposit
money into one, but you have to pick how long to keep it in and commit to that.
Generally, if you take the money out early, you have to pay a penalty fee.
This is great if you know you won't need the money for a specific amount of time,
but it's a risk if plans change and you do need to suddenly access it.
As an example, here are the rates (9/17/2020) for the Ally Bank High Yield CD:
| Term | Annual Percentage Yield |
|---|
| 9 months | 0.50% |
| 12 months | 0.75% |
| 18 months | 0.75% |
| 3 years | 0.75% |
| 5 years | 1.00% |
Money Market Accounts: 0.50% - 0.70%
Money market accounts are similar to a savings account with reasonably high interest rates,
but with the added ability to write checks and use a debit card.
In exchange for the ability to access your money more freely, you'll earn less
in interest than you would in a CD or even some high yield savings accounts.
Here are some examples:
How Much You Could Make in Interest?
Plug in a set number of years and a dollar amount to see how much you would earn
in interest. Keep in mind that for the CDs you would need to keep the money in for
at least that term length.
Why Invest in Short Term Investments?
- The money is guaranteed to make a positive return - If you're saving for a
down payment on a house, a car, a wedding, or something else, you want
to make sure the money you need will not have lost value. These investments
are sure to be there when you need them and not have lost value.
- You may earn more interest than keeping the money in cash - Some of
the options here, such as the longer term CDs, will earn more interest
than ordinary savings accounts.
Why Not to Invest in Short Term Investments?
- Your money can be restricted as to when you can use it - If you choose
to invest in a CD with a penalty for early withdrawal, your money is locked up
for a certain term length, unless you want to pay the penalty.
- High yield savings accounts can earn nearly the same as these investments - These
investments are earning at most 1.00% for a 5 year CD, but some savings
accounts we discussed previously can earn 0.80% which is pretty similar,
but with a lot more flexibility than a CD! Money market accounts let you write checks,
but you can use a checking account for that. You might be better off just
putting your money in a high yield savings account instead.
- A short term investments loses its relative value over time - Similar to cash,
the return rates are too low to offset rising costs due to inflation.