Low Risk- High Liquidity Alternatives to Make Your Money Work For You
There are better ways to keep your money (and grow it) even when trying to stay highly liquid for whatever reason, than to keep it in raw cash or in a checking account. The following options have varying levels of liquidity and risk. It could pay to take on that little bit more risk for a slightly higher return.
The obvious first choice is the good old savings account. Savings accounts at least in Canada earn a reasonable amount of interest. This is my go to when liquidity is an absolute necessity. Unlike fixed term deposits you can take your money out as it pleases you without being penalized. Deposits are also protected to the tune of $100,000 so you can rest easy.
Term deposits is the next best way to keep your money (relatively) liquid and earn interests if you are unwilling to take on any risk. It’ll also encourage you to save because you will be penalized for early withdrawal. The upside is that you earn more interest than you do on your savings account.
Guaranteed Investment Certificate (Canadian)– This is probably going to be called something different depending on where you live (if at all you have something similar). GICs are very safe investments that pay a fixed rate of return over a period of time. You don’t run the risk of losing your capital and will most certainly receive the promised payments. GICs generally pay higher rates than savings accounts depending on the type and term.
Government bonds are the least risky type of fixed income security out there. But of course they pay little interest so you have to be careful to compare the rate you receive to the inflation so you don’t end up losing purchasing power.
Corporate bonds are a much better alternative to government bonds as they pay much higher interest rates. Of course they are less safe than government bonds so you have to do your homework and pick bonds rated BB and above. You can go further than that if you’re even slightly financially savvy by carrying out some investigation about the company’s recent (and maybe even historical) performance.
Open-end (mutual) funds allow you to invest at anytime, and add more to your initial investment as it suits you over time. Closed-end funds only allow the initial investment and penalize you for early redemption (if at all you are allowed to redeem early) so we can ignore closed-end funds. Mutual funds invest in a portfolio of varying types of financial assets using contributed capital from many investors, and are highly diversified. For those who would like to invest in a portfolio of stocks but have no time to carry out the necessary investigation necessary to figure out what shares to include, or for those who don’t have the financial savvy to do that, mutual funds are an easy alternative. Another upside is that the performance of the underlying stocks is monitored by professionals. Mutual funds can be actively or passively managed, and it would behoove you to find out how the portfolios that individual has previously managed performed. Of course mutual funds charge a management fee.
Index mutual funds track the performance of a market index such as the S&P 500. Investing in this ensures that you make a return close to the market return. Some index mutual funds might require you to pay a redemption fee for early redemption, and you have to take note of any front or back end loads (commissions).