This article originally appeared on Arrest Your Debt and has been republished here with permission.
There are various liquid investments you can profit from. However, we need to define and understand what a liquid investment is. Before you invest in anything, you should understand everything about it–from availability to potential risk.
The most basic truth to investing: if you can't explain an investment to a six-year-old, you don't understand the investment yourself.
Liquid Investment Definition
In simple terms, a liquid investment, also known as a liquid asset, is any type of investment that can quickly and easily be converted into cash.
For example, a money market fund would be considered a liquid investment, or liquid asset, because it makes money from interest, but is still quickly accessible to cash out.
Real estate, in comparison, can't be quickly turned into cash because it requires the sale of the property and transfer of ownership, which can take an extended period of time.
13 Best Liquid Investments Available
This section will go over some of the most common and stable liquid investments you can make this year.
1. Cash Investments
These investments include banking with regular savings accounts, term deposits, or high-interest savings accounts available at traditional banking institutions. Cash investments give the lowest returns of all investments available. Simultaneously, cash investments don't have any growth capacity but offer the most protection from market risk.
2. Fixed Interest
Of all fixed interest securities available, bonds are the most common. Bonds are sold when companies or governments need additional capital and issue bonds to borrow money from investors for a quick cash infusion. The borrowed money is usually paid back at a set interest rate.
These kinds of bonds can also be a type of defensive investment because they're relatively safe investments which result in lower returns than high volatility investments. You can also sell bonds very easily, but you may have to deal with capital losses.
Think of a share of a company (stock) as a type of growth investment that can help you boost your original investment value. This is a type of medium or long-term investment. When you have ownership of shares, you can also earn from dividends if the company offers them.
Dividends are part of the company profits, or earnings, that's paid out to the shareholders. The value of each share differs and may drop below the price you initially purchased it for. The value of a share, known as equity, can fluctuate daily due to active market trading.
Owning individual shares (individual stocks) are generally long-term investments meant to profit from their success. However, with the potential of company growth comes the potential of an industrial decline and a reduction in your investment value.
4. Online Savings Account
An online savings account is an excellent liquid investment, and it's risk-free. Consider a good high yield savings account and earn some interest on your money.
This investment is suitable for people with some idle cash that want to avoid the annual losses that come with inflation. You can simply move your money from a regular bank account, where it earns no value, and transfer it to a high yield savings account where it will make a small amount of interest––while remaining liquid.
These accounts can be opened easily and usually don't have any expense ratios or transaction costs attached to them.
5. Crypto Savings Account
Saving money in a regular bank account doesn't earn you money. However, having a cryptocurrency savings account is an option.
Through these platforms, you can easily deposit cash and purchase a stablecoin. The stablecoin will trade at a ratio of 1:1 with the dollar, and you can make your exchange at any time. You can also access your money anytime for this investment because the money is liquid in your cryptocurrency account.
Just like banks, companies like Blockfi also make loans for interested parties. While relatively new, these accounts can pay you as much as 8.6% in stablecoin annually. The stablecoin can undergo a cash conversion back into US dollars. The rate is more than 15 times higher than what a bank offers, which is a good investment.
You also need to know that having a cryptocurrency savings account means that your money doesn't always have FDIC insurance like a traditional savings account. In addition, Cryptocurrency accounts are also linked to numerous cases of digital theft.
Working with Crypto, however, gives you deposited funds insurance. This means that your money is more secure from issues like theft. Crypto is an optional liquid investment opportunity, and you can begin by investing a small amount of money.
6. Certificates of Deposit (CDs)
A Certificate of Deposit (CDs) involves depositing money for a particular period of time. The investment guarantees your return regardless of interest rate fluctuations during the length of the investment.
Consider buying a CD from a financial institution with FDIC insurance. This gives you investment insurance for as much as $250k. CDs are structured so that the longer you tie up your money in the certificate, the more interest you can earn.
7. Money Market Account
Money market accounts are a reliable investment option to consider for your liquid funds. At the moment, these accounts pay comparable Annual Percentage Yields (APY) to one-year CDs and still allow direct access to funds.
Money market account holders get ATM cards, deposit slips, and checks after opening a money market account. The money market accounts operate based on the balance in an account. They don't perform based on the amount of time you invest in your money.
The risk involved in this investment is minimal, yet you get to earn a higher return rate for your money than a traditional savings account. For these reasons, money market accounts are a common investment preference among smart investors.
Alternative Liquid Investments
The investments discussed here are more diversified than the previous ones described. However, the disadvantage with most of these alternative investments is that they're not entirely liquid. This means that the assets will be locked up for a period of time.
If the investment is in real estate, for instance, it's considered a great alternative investment. The real estate investor generally should invest for a long time for the best returns.
Currently, there are some new and unique alternative investments that utilize real estate to create wealth. These investment ideas are short-term maturities and quite convenient. They work outside the stock market, and that is why they're regarded as an alternative. They include companies like Fundrise that sell real estate investments as well as low-cost ETFs.
To invest in Fundraise, you need $500 as a minimum deposit, and you can expect 8 to 12% returns. Another example of recent alternative investments is worthy bonds. This investment entails investing in small businesses through buying their bonds. From the investment, you can get up to a 5% rate of return.
8. Online Checking Accounts
Online checking accounts are like online savings accounts. This type of investment is suitable, especially if you're looking for short-term investment. The accounts give you many of the benefits you receive with an online savings account since online checking accounts offer more liquidity on investment.
Online checking accounts offer the highest liquidity level because you can withdraw your money with a click of a button. The other great feature about online checking accounts is that they offer free cash bonuses to investors.
Some of the recent promotions have included cash bonuses worth $150 from a deposit of $15k, and for a $25k deposit, a cash bonus of $200. The bonuses and low interest rates are factors that encourage people to invest in online checking accounts.
To make it convenient, online institutions provide account holders with debit cards for easy ATM withdrawals.
9. A Roth IRA
This type of investment is funded with after-tax income, and your money grows tax-free. This means the interest you make from your investment in a Roth IRA can be withdrawn at a later time without paying income tax! Roth IRA's are one of the best investments available due to the tax benefits.
In addition, if you leave your money in a Roth IRA for five years, you can withdraw portions of the money you have deposited into the account at any time. However, there are certain restrictions on withdrawals from a Roth IRA.
If you withdraw any of the interest gained from your investment before the age of 59 1/2, you'll pay income tax on the money and an additional 10% withdrawal penalty. There are a few qualified exemptions for early withdrawals that won't be discussed here.
Funds in a Roth IRA can be invested in mutual funds, bonds, ETFs, and more which will provide various returns on your investment.
10. Corporate Bond Funds
Compared to money markets, bonds are not as stable. Due to volatility, bonds usually offer investors a higher return on investment. Bonds are a market product, and earnings are, therefore, based on the existing market condition in changing monthly payments.
Short-term bonds usually take two years or less to mature, which is a motivation for many investors. The short time of maturity is a factor to consider before investing in bonds. You can buy bonds from many online brokerages like Robinhood and Webull.
11. Pay-off High-Interest Debt
This is a great investment in yourself that enables you to earn fantastic investment returns. If you own a credit card with an interest rate of 15% and a balance of $10,000, you pay extremely high fees each month. Paying off this debt is similar to getting a return of 15% on a $10,000 balance.
Paying off high-interest debt not only makes excellent financial sense, but it also helps you to save money. You save from future investment costs, and your financial situation is likely to improve. This investment is a complete win, giving you returns and saving you money.
Many people in the United States live paycheck to paycheck and use credit cards to pay for their basic needs. Credit card debt is extremely detrimental to financial stability and should be paid off as soon as possible.
12. Treasury Inflation-Protected Securities (TIPS) – 5-Year Investment
Commonly referred to as TIPS, these are inflation-indexed government bonds. The TIPS interest rates are tied directly to the consumer price index and current market conditions. TIPS are offered in 5, 10, and 30-year investments.
For example, suppose an investor owns $100 in TIPS with a coupon rate of 1%. After the first year, if there were no inflation, the investor would make $1. If inflation rises by 3% the next year, the coupon rate will increase by 3% for a total of 4%. However, if deflation would occur, the interest rate would decrease by the deflation percentage rate.
Since TIPS' interest is taxable, many investors prefer going into a mutual fund and TIPS ETF. Mutual funds and ETF shares are bought through brokerage accounts.
13. Municipal Bonds
Compared to TIPS and other government treasury investments, municipal bonds are a bit riskier. However, most municipalities don't default bonds. The most significant risk with municipal bonds is that of interest rates.
Government bond funds usually have lower interest rates than short-term corporate bond funds, and in such an environment, the bond's value lowers to compensate for the rates when they arise in the marketplace.
Unless the municipality defaults, holding the bond to maturity enables you to gain 100% back on your original investment as well as the interest your investment earns.
Wrapping It Up
If you have some money that you want to sock away, what better way is there than to have it earn you more money? That is the fundamental reasoning behind liquid investments. There are various short-term and less risky investments you can venture into and secure your money while earning more.
The main factor to always consider is that the investment should be easy to liquidate and have immediate access to cash for a financial emergency.