I help people with both their short-term and retirement planning and investing.
I’m often asked the following question:
“I just received some cash that I’d like to use within the next 6 to 12 months. I’ve deposited it in the bank, but it’s barely earning interest. What should I do with this money?”
What are the options?
Before examining the different possibilities to invest short-term cash, first clarify your goals. By knowing the money’s ultimate destination, you will narrow down your investment possibilities.
Typically, I help people buy stocks, bonds, and mutual funds, as well as bank deposits and money market funds. So how do you determine which of these is best for your short-term investment?
Stocks may be a good investment for potential growth. But the possibilities for making money go along with the potential for loss, and if the cash in question is needed in the short term to buy something specific (a property, tuition, or wedding bills, etc.), risking it may not be wise, and something that has a better chance of conserving the real value of the money may be appropriate.
Short-term bonds or bond funds might make sense for those expecting to use the cash within the year. However, the expenses of the transaction itself, taxes, and risks involved mean that you might not come out any better by using them compared to simply keeping the money in a low-yielding money market or bank deposit. Remember, even blue chip companies and U.S. Treasury bonds carry a risk of default. Consider, as well, the amount of money here. If the sums involved and the potential gain are relatively low, is it worth the hassle to buy, monitor, and report income on the investment?
Cash is King
Unfortunately, the cost of liquidity means you can’t invest particularly aggressively and you may have to settle for your bank’s low interest rates. Cash, either in a savings account or an FDIC-insured money market fund, may be your best bet to make sure you have it. So the moral is: don’t take risks with money you need in the short term.