If you are considering a short term investment, then you need to look at various factors such as ease and mode of accessing the money, interest rate and the penalties attached to early withdrawals. You should compare advantages and disadvantages of different short term investment options before you settle for one.
There are various options that you can use for short term investments. The most popular investment options are checking accounts and savings accounts. The interest rate in these accounts is very low, but it is easy to access money from these accounts. All you need to do is to write a check or find an ATM machine to access your money.
They also offer high security as they are FDIC insured. However, you would need to maintain some minimum balance and if your balance falls below that level then you would incur a penalty. You might also have to pay some fees in such a case.
Various brokers and banks also offer accounts that combine the advantages of checking accounts such as use of checks and ATM machines, with the return rates of money market accounts.
The high return varieties of checking and savings accounts are also offered by many banks. These accounts are the best option for short-term investments. You get reasonable returns with low risk as they are FDIC insured and the freedom to withdraw your money according to your convenience.
Online-only banks offer very good interest rates that often match interest rates of CDs and other investments that require money to be tied up for some time. However, you will not get other frills such as ATM or debit cards and check books with these accounts. Do not fall for limited time interest rate offers that are used to attract customers.
Further, money market deposit accounts can be opened in banks by maintaining a minimum balance. The number of transactions are limited but it is easy to transfer and access money in these accounts. You get FDIC insurance but have to forego high returns. Penalties are attached for keeping low balance or doing excessive transactions.
Another good option is money market funds that are offered by mutual fund companies and brokers. They are relatively safe as money market crashes very rarely, issuers try to maintain the price of share at $1 to protect your principal and they invest in safe securities. However, there is no FDIC insurance for these funds. It is easy to access your money in these instruments and you get high returns.