If you don’t want to tie down your cash in long-term assets but still want to invest those extra bucks you have, what are your options? In an unstable economy, short-term investments may be a safer alternative. Here are ten highly liquid investments you may want to add to your portfolio.
16 Highly Liquid Investments: Keep Cash on Hand While Invested
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Are you looking for safer options to invest your money for a short period? If you want to invest but will need the money in the not-so-distant future, then highly liquid investments are ideal for you.
Liquid investments are perfect for investing your money with little or no risk while knowing that you can still access the cash in the near future.
Making short-term investments is the best way to make your money work for you to help accomplish a goal in the near future.
For example, if you are planning a wedding or you want to save for a house downpayment, short-term liquid investments can come in handy.
These investments usually last for less than three years. With these kinds of investments, you potentially sacrifice higher returns for the safety of getting back your money soon.
What is a Liquid Investment?
A liquid investment is a form of investment that can be converted into cash easily while having little or no impact on its value. Liquidity means a company or person has enough liquid assets to help them make bills payments on time.
Liquid assets are equivalent to cash because when sold, their value remains the same. The investments must have these characteristics:
- It must be in an established market
- Must have a large number of interested buyers
- Must have the ability for ownership to be transferred easily
Some liquid resources are far more liquid than others.
So, which are the most liquid investment out there that will not tie your cash for long, but still give you bountiful returns?
List of Highly Liquid Investments
Here, we will explore some of the investments that can bring you some good returns.
Let’s delve in:
Cash on hand is the most liquid asset, as it does not need to be sold for it to be used. If a company or an individual needs to settle a few liabilities quickly, then they can use cash-on-hand.
A High-Yield Savings Accounts
Money in your savings accounts is also highly liquid because you can easily access and use it to settle your bills. Having a high-yield savings account is a risk-free way to earn some interest on your cash.
A savings account at a financial institution pays a nominal amount of interest regularly for just depositing your money in the account.
Some savings accounts have up to six fee-free transfers and withdrawals per statement cycle. Avoid financial institutions that charge accounts maintenance fees or fees for accessing ATMs.
This is an ideal investment for short term investors but not long-term investors because of the risk of inflation.
My favorite high yield savings account is with CIT Bank. They offer some of the most competitive rates out there and I personally use them to stash cash away.
A checking account is another highly liquid investment that can serve your short-term needs. Unlike a savings account, the number of withdrawals from a checking account isn’t limited.
And, although the interest rates of a checking account are relatively low compared to that of a savings account, checking accounts, on the other hand, offers bonuses.
Certificates of Deposits (CDs)
These are less liquid as you must wait until the maturity date to withdraw. However, their returns are higher than that of other bank products like money market, and savings accounts.
CDs are a time deposit, which means that if you open a CD account, you promise to hold your money in the account for a specified time which can range from weeks to years.
If you withdraw your CDs before the due date, you incur a modest penalty. In exchange, you get a higher interest for holding the money in the bank’s vault.
The bank pays you a regular interest, and at maturity, you will receive your principal amount plus the total interest earned.
FDIC insures CDs up to $250k, making the investment quite safe. The risk of holding a CD is that you can miss another better investment elsewhere while your money remains tied up in the CD account.
With a Certificate of Deposit (CD), the longer the term of investment, the higher the yield will usually be.
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Bonds are also examples of highly liquid investments and can be sold relatively quickly with little or no impact on their market value.
They are an excellent option for making passive income and includes:
Corporate Bonds Funds (Short-term)
These are highly liquid since they can be bought and sold on any open stock market day. Major corporations issue corporate bonds if they want finances for their investments. Short-term corporate bonds are considered relatively safe, and they pay regular interest rates usually quarterly or semi-annually.
Corporate bonds are less safe than government bonds as the local or federal government does not back them up. This means that you can lose the money invested in them if the bond performs poorly.
However, investing in a diversified portfolio of different corporate bonds, commonly called bond funds, which are bonds from different companies, eliminates this risk.
Having a diversified portfolio hedges you against the risk of losing your entire investment from a single poor-performing bond.
Holding your corporate bond to maturity will eliminate the interest rate risk.
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US Government Bond Funds (Short-term)
US Government bond funds are similar to corporate bonds, only that the federal US government and its agencies issue them, unlike corporate bond funds that are issued by companies. Government bonds buy investments such as;
- Mortgage-backed securities
They purchase them from enterprises like Freddie Mac and Fannie Mae which are sponsored by the government. These kinds of bonds are low-risk and safe because they stand on the government’s promise to repay the money.
Treasurys, which include, the T-bills, T-bonds, and T-notes, are safe investments that the AAA credit rating of the US federal government provides protection for.
They are considered highly liquid because you can exchange them on any open stock market day.
Government bonds are some of the most traded kind of investments and are usually traded on any day provided the stock market is open.
These bonds are also highly liquid though slightly riskier than other Treasury investments and TIPS. Though a lot of municipalities do not default on their bonds, nunicipal bonds have a high-interest rate risk.
Other Highly Liquid Investments
Shares and stocks can be sold in the stock exchange with just a click of a button within the same price or at few cents higher than their market value.
However, when considering where to put your money for emergency savings, stocks aren’t the most favorable.
The reason being, they are highly volatile and can fluctuate within seconds. You don’t want to sell your stock at a loss because you have an emergency. Want free stock? These apps will give free shares of stock for signing up.
Money Market Accounts
Money market funds are also bank deposits that pay higher interest rates than savings accounts, although they also require a higher minimum investment.
They are highly liquid, although the federal laws impose restrictions on withdrawals. You are only allowed six withdrawals per month though there are exclusions when it comes to ATM withdrawals. ‘
The FDIC insures up to $250,000 per depositor, per bank in money market accounts.
They are usually based on the account balance, and not necessarily on the length of time, that you invest your money. You can use a money market account for your emergency fund. Here is why you need to have an emergency fund at your disposal.
Mutual funds are the managed portfolio of investments, where investors pool money and invest in various low-risk, low-yielding financial securities, including bonds and stocks. They are highly liquid because they can be sold daily.
This means you can place a “sell” order, and the position will be liquefied and quickly converted into cash in your account within 24-48 hours.
With mutual funds accounts, the fund manager or a broker executes the transactions and not on an open market.
Exchange-Traded Funds (ETFs)
These are more liquid than mutual funds. Investors get a chance to invest in a diversified portfolio just like in mutual funds. However, unlike in mutual funds, investors here can trade their investments during the market hours.
Institutional investors use ETFs to place exit and enter positions.
And, unlike Individual investors who have no alternative when there is a decrease in liquidity, institutional investors can buy or sell creation units (the underlying shares baskets that make up each ETF).
See Related: Personal Capital Review
Cash Management Accounts
These are offered by robo-advisers and online stock brokers. They enable you to invest money in a wide range of investments which are short-term.
With this account, which acts more like an omnibus, you can still invest, transfer money, write checks off, and perform any other activities that are bank-like.
Cash management accounts are safe investments because they are usually invested in low-yield and safe money market accounts funds.
For example, robo-advisers can deposit your cash into partner banks protected by FDIC. Cash management accounts are highly liquid, and you can withdraw your money at any time. One of the best ways to do this is for completely free with M1 Finance.
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Most alternative investments are illiquid, although there are a few new short-term peer-to-peer investment ideas, which are pretty liquid.
With Lending Club, you can lend money to businesses and individuals, who pay it back with interest within a short period. The minimum deposit is $25, and the expected return is between 4 and 7%.
With Worthy Bonds, you purchase their bonds, which is a handy way of investing in small businesses. You can get a fixed 5% interest with a minimum deposit of $10, and the expected return is 5% fixed.
Fundrise provides low-cost ETFs for real estate’s online. Each investment obtains and manages separate real estate properties. With a minimum deposit of $500, you can get an expected return of between 8 and 12%.
See Related: How to Invest in Real Estate with Little Money
Accounts Receivable and Inventory-on-Hand
In businesses, liquid assets can be converted into cash quickly, usually immediately or within 1 to 3 years. For example, we consider accounts receivables as liquid because the business can collect them within a year.
Inventory on hand is also liquid because the company can sell them within a year.
On the balance sheet, we list assets in descending order of their liquidity, and cash is generally listed first.
See Related: Why Personal Finance is Important
Conclusion on Highly Liquid Investments
If you want to stack away some cash for a short period and earn while on it, with these highly liquid investments, you won’t be limited over options. When making a short-term investment, go for assets that are easy to liquidate.
Also avoid investments that charge high fees for withdrawals, or are too risky for the short-term. This is why you need to become financially literate to ensure that the decisions you make, are prudent.
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