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The Top 3 Safest Short-Term Investments for Beginners

Updated on July 13, 2016
Make Your Savings Work For You
Make Your Savings Work For You

You’ve done everything right – stayed out of debt, pinched pennies where you could, and put away money into a savings account. You know that if you stick with these parameters, you’ll end up with a cushion to fall back on in hard times, but what do you do when that cushion reaches a certain size?

You should invest it. Whether it’s investing for the long-term, such as retirement, or investing for the short-term so that you can withdraw money when you need to, there are some things you should keep in mind as a beginner investor.

For the investments that you intend on tapping into in the next one to five years, there are some main goals you should have.

  1. Be sure your nest egg is safe. Stocks are going to change rapidly over time, and while they might be a good investment for the long-term because they can come back from their wild downslides, they are not a good investment for someone who wants to withdraw their money in a few years. For example, if you’re saving up for your dream home and you’d like to earn interest on the down payment you’re saving - stocks are not a good idea. If the market takes a dive and you find your dream home the day after, odds are your portfolio value won’t be enough to cover the down payment.
  2. Make sure it earns a continuous return. The name of the game with investing is the lesser the risk, the lesser your return will be. If your main objective is to preserve your nest-egg until you’re going to need it, you most likely won’t earn a lot on it until then. That doesn’t mean you shouldn’t be investing, but it does mean you should have realistic expectations. A continuous steady earning in interest over time may be a better opportunity for you if you’re not one to take risks.
  3. Keep all savings liquid. Liquid means the money is in the form of cash or something that you can easily transform into cash. Your house, your car, and that art collection you started purchasing are not liquid, but a savings account is. For investments you might need to use in the near future, the liquid investments are better.
  4. Make sure it’s not too easily accessible. While you want your money to be where you can easily access it if you need it, you don’t want it to be too easy to get to. If your entire life’s savings is kept in a checking account, it’s extremely easy to use that checking account whenever you make an impulse buy. Putting your savings into a separate account without access to it through checks or a debit card makes it much harder for you to use that money, but it’s still there if you need to transfer it and use it.

Three investments meet the criteria listed above. Some of them, such as the CDs and savings accounts, are very safe investments, but they don’t provide a lot of interest. Others, such as the bond funds, are not as safe, but they do offer you the opportunity to earn a little more return without too much risk.

#1 Savings Account

The easiest and most well-known way for a beginner investor to save their money and earn interest on it is through a savings account. These are the most suitable places to collect extra cash. They are practically entirely liquid. You are able to withdraw your money anytime you desire, and they are guaranteed by the FDIC.

Some things you want to investigate with a savings account include:

  • Interest rates. According to the FDIC, the national average for interest rates on savings accounts is 0.06%. This rate is not enough to keep up with inflation, but there are some options out there at specific types of banks, such as online banks and credit unions, which offer ten times that interest rate. Therefore, it’s important you do some shopping around to find the best deal for your money.
  • Account balance. Certain banks are generous and allow anyone to open an account with just a dollar. Nonetheless, the accounts that are going to offer you the best interest rates available will have a minimum account balance that can be anywhere from $25 to $50,000. Some banks won’t necessitate a minimum sum to open an account, but they will entail you to maintain your average balance at a certain amount to avoid any fees.
  • Check and debit cards. Banks allow you to withdraw money from a savings account by going to the bank and withdrawing through a teller or by going to an ATM and withdrawing from there. However, most will not allow you to use checks or debit cards to make purchases from your savings account.
  • Monthly transaction limit. The Federal Regulation D law states that you are only able to make six withdrawals or transfers from a savings account monthly. However, this doesn’t apply to deposits and withdrawals made at the bank or an ATM. There is not a limit to the amount of deposits or transfers that you make into the savings account.

#2 CDs or Certificates of Deposit

CDs are basically a fixed-rate, short-term loan you’re making to your banking institution. You agree to loan them your money for a certain amount of time, such as a year, two years, or even five years. In return for this loan, the bank is agreeing to pay you a certain interest rate when your CD matures. The longer the term is for the CD, the more interest it will pay you.

As an example, let’s say you put $5,000 into a one-year CD with an annual percentage yield of 0.23%, the national average according to the FDIC. When that CD matures, it’ll be worth $5,115. At that point, you can choose to withdraw your money, or you can put it into another CD at whatever interest rate is available to you.

CDs are insured by the FDIC, so you will not lose any money on them. In addition, they offer healthier interest rates than savings accounts, so you’ll earn a little more on them.

However, there are some cons to CDs. First, your money is unavailable for a certain amount of time. You are able to use the CD before it matures, but you will usually pay a fee. Penalties will be based on your banking institute’s terms.

One way you can get around this downside is to choose a CD that doesn’t come with penalties, which allow you to withdraw your money at any time. These are known as liquid CDs, but they do not pay as much as a regular one.

#3 Treasury Securities

This is like a CD, except it’s a loan to your government rather than your bank. They are sold through auctions; therefore, the value of the security will depend on what the investors are willing to pay for it at that moment. You can purchase them through banks, brokers, or online.

These securities are sold in $100 increments and come in three different types.

  1. Treasury bill. These are known as T-bills and are short-term securities that will mature anywhere from 4 weeks to 1 year. Rather than paying interest on a fixed schedule, these bills are sold at a markdown from their present value. For example, you might purchase a $1,000 treasury bill for $900, keep it until its maturity date, and then cash it in for the full value of $1,000. These do not tie up your money for too long, but they won’t pay very much either.
  2. Treasury notes. These are medium-term securities that go from two years to ten years in term length. Their price could be more than, lower than, or the same as their face value, depending on the demand. Until they mature, they pay interest every six months. These can be sold before they reach maturity, but you cannot always get full value for them. If the interest rates have increased from the time when you purchased the note, investors do not have a lot of reason to purchase your note, since a newly issued note will pay more.
  3. Treasury bonds. Treasury bonds are long-term securities that will take up to thirty years to mature and pay interest every six months. Just like notes, they are able to be sold at any time, but you might lose money on the sale. This makes them a poor choice for any funds you’ll likely need in the near future.

Treasury securities are safe because the United States Government guarantees them. Unless the government defaults on its loan, then you are guaranteed to receive the principle amount back, along with the interest.

Investing your nest-egg into a short-term investment opportunity that is safe will guarantee you make money while you wait for the opportunity to spend the money you’ve saved. These options allow you to withdraw your money in case of an emergency, but they also make it difficult enough to withdraw your money that you’re unlikely to do so in an impulse buy scenario.


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