If you need to access your money in the near future, you'll want a good short-term investment. What are the best ways to maximize profits and minimize risk if you want to invest the extra cash you have?
Certificates of deposit. CDs are offered by banks and usually pay a higher interest rate than a basic savings account. If you've got limited time, three years is an option, but the longer the investment, the higher the yield, so you may opt for five years. Most CDs will penalize you for withdrawing your funds before maturity. The FDIC backs your deposit up to $250,000.
Treasury securities. These are bonds issued by the U.S. Treasury. You can invest in a variety of treasuries — Treasury notes, Treasury bills and floating-rate notes. Treasury inflation-protected securities are a popular option, and they are indexed to inflation. Their underlying value is based on the consumer price index. Once a TIPS matures, you will get either the adjusted amount or the original investment, whichever is larger: Deflation won't hurt your investment. You can invest in a TIPS directly through the government or with exchange-traded funds or mutual funds to avoid the interest being taxed.
Money market accounts. These FDIC-backed accounts allow investors to earn a higher interest rate than a savings account. You can write checks or use a debit card for your account, although you may be limited in regards to how many times you can do this. A minimum deposit is usually required. Do not confuse this vehicle with the similar-sounding money market mutual funds, which tend to invest in highly liquid investments but are not FDIC-insured.
Bond funds. These can be very useful, if you choose right, and often have a higher yield than money markets. You get the benefits of portfolio managers and yields that have ranged upwards of over 3%. Your investment is not guaranteed, but there are no penalties for withdrawing your money early.
Municipal bonds. These may be a bit riskier than a TIPS or other kinds of bonds, but they offer high-yield potential. Issued by local, state or government agencies, they're often exempt from interest tax. The major downside is that as interest rates rise, the value of the municipal bond goes down.
Paying off debt. This may be one of the most practical ideas if you have money sitting around, and the return can be substantial. Do you have high-interest credit card debt? You may be better off using any cash to pay it down rather than investing the cash at a lower rate. Take a look at other debt: car loans, student loans and your mortgage.
These are all general ideas. Which of these make the most sense for your situation? Discuss them with a financial professional who can help you decide where you should put your money as well as what debt you may be better off retiring.
Newsletter articles are posted every 2 weeks.
If you would like to have our e-newsletter delivered directly to your inbox, please sign up. Your information is confidential; you can unsubscribe at any time. Subscribe.