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Sunday, September 25, 2022

Simple Ways to Get Higher Short-Term Returns Now

Many older Americans are looking for places to put cash to work for the near term. But where can seniors find decent return for funds that need to stay relatively liquid?  

Retirees have been rocked by inflation and downward volatility in the stock market in 2022. In such uncertain times, it is nice to have a cash cushion to draw from, but not so easy to find investments that yield more than a pittance. Senior Spirit tracked down some places where you can stash your money for a few months or a few years and be sure that you’ll have more of it when you need to take it out.

What is Short Term?

A short-term investment is generally considered one that you’ll hold from a few months up to five years. That’s long enough that you want to see some return, but generally not an adequate time to invest in riskier assets like the stock market, which can plunge unexpectedly and stay down for years, even though it’s a great bet for the long run. 

Credit Union Pros and Cons 

If you have never used a credit union, it’s time to check them out. These member-owned, not-for-profit bank alternatives have a lot to offer. Most will let you become a member with a $5 deposit, so it’s worth poking around to find one with the best rate, unless you would prefer to support your own community. What can a credit union offer that a big bank usually cannot?
  • Lower fees
  • Better rates on CDs and savings
  • Lower rates on loans
  • Commitment to members
  • Financial education

Credit unions are not driven by profit, so they may offer free financial workshops, for example, or scholarships in their local community. However, there is also a downside. You may be able to find a better rate at an online-only bank, which doesn’t have to bear the cost to maintain branches. If you like to bank in person, a credit union will have fewer branches than a big bank, unless it is part of a shared branch network and/or an ATM network. Finally, some small credit unions may not offer the number of products a major bank does, and they may offer less technology such as online and mobile banking. 

Short-term investments carry less risk, but they also don’t offer as much return as investments with a longer time to compound. However, that doesn’t mean you shouldn’t look for the highest return on your cash. The best options can vary based on how long you’d like to hold on to your money, so we’ve split our recommendations into three categories based on your holding timeframe.

Under Two Years

If you are likely to need the cash within the next couple of years, then holding it in a very low-risk savings account, money market account, or certificate of deposit (CD) may be your best option. Bump up your rewards by using an online bank such as Ally or a credit union. Did you know about no-penalty CDs? These CDs allow you to liquidate within a week or two of purchase, meaning that if the rate goes up, you are not locked into your current return. They are also perfect for money that needs to remain very liquid. Rates and availability vary by institution.

US Treasury securities, or T-Bills, have terms of 4, 8, 13, 26, and 52 weeks so they are also great for very short-term investing, and they’re practically free of risk. Check current rates before you invest.

Tip: Make sure that the rate on your CD is more than what you could get in a savings account. Currently, for example, CDs that mature in a few months at Ally Bank earn less than a savings account, which won’t tie up your money. Compare all your options before pulling the trigger.

Two to Three Years

Check out the yield on a short-term bond fund, which is a loan to a company or government that pays a set amount for borrowing. For tax-free returns that you would hold in a taxable account, look at municipal bonds, offered by states and cities, and government bonds issued by the US. Avoid junk bonds, which are more likely to default.

Three to Five Years 

CDs have a very low risk for money you will hold for a few years. “Raise your rate” CDs are an option that is especially appealing in times of rising interest rates. They give you the opportunity to literally raise the rate on your CD, usually once or twice during its duration, to catch up with current rates. 

If you have more appetite for risk, consider a peer-to-peer loan. Online sites such as Prosper allow you to lend to borrowers selectively. You can limit your loans to borrowers with better credit scores; you’ll earn less interest, but you have a better chance of getting your money back. To lower your risk even more, lend smaller chunks of money to a greater number of borrowers. And don’t forget to include the service fee paid by investors when you calculate your return. 

Finally, we can’t help mentioning Series I Savings Bonds, or I Bonds, available at Treasury Direct. The rate of return is changed twice a year based on inflation. You must own these bonds for at least a year. If you cash them after that, but before five years have passed, you’ll be penalized the last three months’ interest. As of this writing, I Bonds currently pay above 9%. And although an individual can only invest up to $10,000 annually, any businesses you have each qualify for a $10,000 purchase, as do many trusts. 

Tip: The FDIC insures deposits of up to $250,000 per qualified institution. If you have more cash than that, you may want to invest it in more than one financial institution.

This article is not intended to be a substitute for professional financial advice from a qualified financial advisor.