It can be an excellent idea to strategically invest extra cashflow which can generate good returns on the principal investment, as long as it’s done safely.
Mike Hainsworth has been serving clients in the financial sector since 1995 and has a diverse background with international experience. Working as a financial consultant from Dubai to Fort Myers, Mike Hainsworth has a proven track record of managing millions of dollars of assets, minimizing losses and maximizing the transfer of wealth from his clients to their heirs.
The security of the deposit is the first consideration when looking at a short-term investment. A low rate of return is the trade-off that the investor must live with in return for the safety. This means that the investor should stay away from investments such as stock funds or stocks, investment methods that can be unpredictable enough to lose value in a few months.
Below, Mike Hainsworth’s reviews four alternatives for safe, short-term investments:
- Certificates of deposit
Every bank offers CDs. These investments provide a higher rate of interest than money market accounts or savings accounts. The length of time to deposit money can range from a few weeks to years. The bank typically offers a higher rate of interest in return for promising to keep the money with the institution for a stated period of time.
As with other deposits placed with banks, CDs come with the security of insurance by the FDIC. If the bank goes under, the investor still gets their money back. Money put in CDs may be secure, but it comes with limited liquidity. Should the investor want to get their hands on their money before they deposit matures, they have to pay a penalty.
2. Money market accounts
When investing in a money market account, the bank gives a lower rate of interest than with a CD, but one that is higher than on a savings account. Since banks offer money market accounts, they are covered by the FDIC, as well. The money is highly liquid, but the downside is a relatively low rate of return.
3. US government bonds
It’s possible to place money with the US government by buying their treasury notes, bonds and bills. Also, it’s possible to purchase mortgage-backed securities from government-backed corporations such as Freddie Mac. US government bonds are backed not by the FDIC, but by the credit of the nation. These investments are liquid, as well, and can be converted to cash on demand. Investors have the option of investing in bond funds, which are collections of many different government bonds.
4. Corporate bond funds
While it’s possible to buy bonds issued by corporations directly, such an investment would not be very safe. It would be a better idea to buy a bond fund, a collection of bonds from several companies. When purchasing a fund, make sure that the exposure to the risk of anyone poorly performing bond is low.
The government does not back corporate bonds and bond funds. For this reason, it’s technically possible to lose money on them. In practice, bond funds are safe and come with minimal risk of interest rate changes. The good news is that corporate bond funds are very liquid, and can be changed into cash every day that the stock market functions.
Keeping extra money in a short-term fund or deposit usually eliminates worry concerning the interest unless dealing with substantial sums of money. For small amounts of money, the difference in interest earned between one form of investment and another is usually small. In conclusion, any one of the four investment methods explained above is a sound option.
About Mike Hainsworth:
Mike Hainsworth of Fort Myers is a seasoned financial professional with entrepreneurship experience. He was the President and CEO of Hainsworth Wealth Advisory in Fort Myers, Florida. His main skills include portfolio management, multi-generational wealth transfer, 529 plans, tax, estate, and insurance planning strategies, as well as high net worth insurance.