If you only have a short period of time to invest your money, there are several investment options you should consider outside of typical checking and savings accounts. These alternative short-term investments are called money market securities.
Money market accounts
Some of the characteristics desired in short-term investments are security, liquidity, and returns, and money market accounts exhibit these characteristics. Money market accounts are ideal places for businesses and investors to store their money for a short time while waiting for the opportunity to deploy it. Money is readily available, the risk of default is negligible and the investment mix is well diversified. Thus, even if an individual obligation is not incurred, it does not affect the overall value of the money market account.
Money market accounts generate higher returns for short-term investors than bank accounts. Typically, returns correlate to those earned just above the risk-free rate of return, although there are options for more aggressive and less aggressive accounts.
Treasury bills and commercial paper for short-term investments
For example, you might consider a Treasury bill (T-bill): a US government debt security with a maturity of less than one year. Treasury bills are one of the most tradable securities, and their popularity is mainly due to their simplicity. The maturity of a treasury bill is three, six or 12 months, and new ones are usually issued on a weekly basis. The constant issuance of new treasury bills and the bidding process means that treasury bills can be easily redeemed at any time. Additionally, banks and brokerages traditionally charge a very low commission on Treasury bills. You can buy US Treasury bonds through any of the 12 Federal Reserve Banks or 25 branches.
Commercial paper is another investment you might consider. It is a short-term, unsecured loan issued by a company, usually to fund accounts receivable and inventory. It is usually issued at a discount to reflect current market interest rates. Maturities generally do not exceed nine months and, due to their slightly higher risk, they generally offer a higher rate of return than a Treasury bill.
Certificates of deposit and bankers’ acceptances
Certificates of deposit (CD) are term deposits with banks. These term deposits cannot be withdrawn on demand like current account funds and are usually issued by commercial banks, although they can also be purchased through brokerage houses. They carry a specific maturity date (from three months to five years), a specific interest rate slightly higher than that of Treasury bills and can be issued in any denomination. However, the amount of interest you can earn depends on the amount and term of the investment, the current interest rate environment and the specific bank. While almost all banks offer CDs, rates can vary widely, so it’s important to shop around.
Bankers’ acceptances (BAs) are short-term credit investments created by non-financial corporations and guaranteed by a bank. They are traded at a discount to their face value in the secondary market. For corporations, a BA acts as a negotiable term draft for financing imports, exports or other goods transactions. This is particularly useful when the creditworthiness of a foreign trading partner is unknown. The advantage of BAs is that they do not need to be held to maturity and can be sold on secondary markets where they are constantly traded.