What Are Short-Term Investment Options?

If you only have a short period of time in which to invest your money, there are several investment options you should consider outside of the typical checking and savings accounts. These alternative short-term investments are known as money market securities. 

Some of the desired traits in short-term investments are safety, liquidity and returns, and money market accounts have these characteristics. Money market accounts are ideal places for corporations and investors to park their cash for a short time while they wait for an opportunity to deploy it. The money is easily accessible, there is a negligible risk of default, and the investment mix is properly diversified, so even if some individual obligation is not made, it does not affect the money market account's overall value.

Money market accounts generate returns for short-term investors that are higher than bank accounts. Typically, the returns correlate with those earned just above the risk-free rate of return, although there are options for more aggressive and less aggressive accounts.

For example, you might want to consider a Treasury bill (T-bill): a U.S. government debt security with a maturity of less than one year. T-bills are one of the most marketable securities, and their popularity is mainly due to their simplicity. The maturity for a T-bill is either three, six or 12 months, and new ones are typically issued on a weekly basis. The constant issue of new T-bills and the competitive bidding process mean that T-bills can be easily cashed in at any time. Furthermore, banks and brokerages traditionally charge a very low commission on trading T-bills. You can purchase Treasury bills in the U.S. through any of the 12 Federal Reserve banks or 25 branch offices. (For related reading, see: Introduction to Treasury Securities.)

Commercial paper is another investment you might want to consider. It is an unsecured, short-term loan issued by a corporation, typically for financing accounts receivable and inventories. It is usually issued at a discount to reflect current market interest rates. Maturities usually range no longer than nine months and, because of their slightly higher risk, they usually offer a higher rate of return than a T-bill.

Certificates of deposits (CDs) are time deposits at banks. These time deposits may not be withdrawn on demand like funds in a checking account and are generally issued by commercial banks, although they can also be bought through brokerages. They carry a specific maturity date (three months to five years), a specific interest rate slightly higher than T-Bills and can be issued in any denomination. However, the amount of interest you can earn depends on the amount and length of the investment, the current interest rate environment and the specific bank. While nearly every bank offers CDs, rates can vary widely, so it's important to shop around.

Banker's acceptances (BA) are short-term credit investments created by non-financial companies and guaranteed by a bank. They are traded at a discount to face value in the secondary market. For corporations, a BA acts as a negotiable time draft for financing imports, exports or other transactions in goods. This is especially useful when the creditworthiness of a foreign trade partner is unknown. The advantage of BAs is they don't need to be held to maturity and can be sold off in the secondary markets where they are constantly traded.

(For more information, see: Money Market Tutorial.)