Short Term Bond vs. Money Markets

Many investors are faced with the decision of choosing a short term bond or a money market account when they have money for investment purposes. Both options are good, your personal situation and financial goals will determine the type of investor you are. While they both have some benefits, they are not without their shortcomings. Here are a few things to consider about short term bonds and money market accounts.

Short Term Bonds

There are a few different types of bonds that you could qualify as short-term bonds. The three most common forms of a short-term bond come as a Certificate of Deposit, United States Treasury Bonds and corporate debt instruments. All of these are similar options as you are loaning your money to someone for a certain period of time in return for a set rate of return. 

With a CD for example, you give them your money and agree to loan it to them for a certain period of time. The CDs are insured by the FDIC so the risk is pretty much not an issue with these. You have to leave the money in the CD for the entire term or you will have to pay penalties to get the money out. 

If you use a U.S. Treasury bond instead, the risk is also not an issue. They are backed by the federal government as well. The risk on a corporate bond is a little higher as it depends on whether or not the company stays in business or has enough assets upon dissolving to pay you back. The returns on short term bonds are usually going to be a bit higher than what you can get from a money market account, but they are still small in comparison to other types of investment. 

Money Market Accounts

With money market accounts, you are getting a much more flexible type of investment. When you put your money into a money market account, you are free to withdraw it at any point. It is almost like having a checking account that draws you a higher rate of interest. Although, you will most likely have a limit to the number of checks that you can use per month with a money market account.

Money market accounts can be considered a little riskier than most bonds as they are not FDIC insured. The safety of your investment depends on the strength of the investment company that is offering it to you. Money market accounts are basically like a mutual fund that tries to keep their share price at a $1 constantly. They use the customers money that is in the money market account to invest in low risk securities like savings bonds and Treasury bills. This will give you a similar return to what you can get with a bond, but you can get your hands on your money whenever you want. To get a money market account, you will have to open an account with an investment broker that offers this type of account.

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