As long as we are in our earning years, our investment strategy should target the long game. Get rich quick, buying and selling, and IPO schemes are only great for excitement and anecdotes over cocktails. If you hedge your future on gambling, you are betting against the house.
The name of the game in short-term gains ultimately lies in liquidity. This is your pot of funds that allow you to have immediate or near-immediate access. This is sort of like your emergency fund stash. Some people are against keeping any sort of emergency fund, citing that credit cards or lines of credit will allow some flexibility in a pinch.
I sort of keep my emergency fund stash in the same pot as my short-term fund storage bin. This is a set amount of money that I keep around that might come in handy somewhere in the 3-9 month range. These are funds that I might need for a big ticket purchase, like a deposit for a mortgage, tax payment, or sizable investment. Now as with any smart investor, you don’t ever want to keep too much money lying around that’s not working for you. You work hard enough in your day job. It’s your money’s turn to make more money.
In my book, short-term investments simply need to have decent liquidity and safety. You don’t want to end up losing half of your money due to volatility by the time you need to withdraw it for other uses. This only leaves conservative investments like money market accounts, CD’s, and bonds.
Money Market Accounts
By default, I keep all of my in-limbo funds in my money market account. I get FDIC protection, debit withdrawals or even check writing. This is just money that I’d otherwise transfer to my checking account to pay the bills, only that there is a slightly higher interest rate (approximately 1% these days in high-interest MMAs). Hey, 1% is not much but better than nothing. In the grand scheme of things, unless you’re keeping a sizable chunk of money in the savings account what else you do with your money probably isn’t going to affect your retirement.
This is another form of financial security that banks and credit unions offer. It’s essentially a way for the financial institution to have cash on hand in its books for lending, negotiation, or even borrowing. For the investor, CD’s offer a risk-free means to get a set rate of return. In 2018, the interest rate is roughly twice that of a MMA. The only downside is that you have to lock up the money for a fixed period of time.
Treasury bills, or T-bills, are financial securities that are sold by the U.S. government. While I studied hard for my high school AP U.S. History exam, I’ll be first to admit that I frankly do not have enough political or economic interest to evaluate how the government decides to use these funds. What is important for me is that these securities are backed by the U.S. government. This means that T-bills are safer investments than bank accounts themselves because those funds are also backed by the government. If the government ends up defaulting on its T-bills, then we’d all have bigger concerns to worry about than losing our investment.
Most recently, you can purchase T-bills that mature in 3,6, or 9 month intervals at an interest rate nearly at 2% annually. That is probably the best deal you can get for short-term, essentially no-risk investments. You can purchase them through the U.S. government directly at http://treasurydirect.gov, or through your broker. I’ve purchased mine through Fidelity. These rates are currently much better than what you’d otherwise get from a bank CD.
Short-term Investment Strategy
Before purchasing T-bills, I had only purchased bank CD’s in a ladder so that I’d have certain amounts maturing as I needed the money. It was a convenient means to improve my passive earnings since it was easy to open CD’s at banks that offered high rates. I was too lazy to open an account on treasurydirect.gov. Then I realized that I needed to be strategic to minimize my tax burden as well.
T-bills are not subject to state taxes. Sure, everything else is taxed at your federal marginal tax bracket, but if you live in a high income tax state like California, you could save up to 10% on state taxes. For a 9-month T-bill investment of $10,000 at 2% discount, you’d gain roughly $150 before income taxes. If you were to buy a CD at the same rate while living in California, you could end up paying an extra $15 in state taxes when you’re at the top tax bracket (you will be as a doctor).
Is $15 worth your time to open a T-bill? You can decide. If you are drowning in cash flow from your multi-unit apartment rentals you probably can’t be bothered to mess with the low-end T-bill investments. On the other hand, if you are stashing $300,000 for an upcoming mortgage in 9 months, a T-bill isn’t a bad way to grow some interest while you wait. It’ll buy more than a few espressos at your local barista.