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Issue #31-10.23.07
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Turn Short-term Windfall into Long-term Gain
Remember when you were a kid and you’d be walking down the street or playing at the park and happen across something that looked like a crumpled piece of paper, but the color grabbed your attention. You got a little closer and the words, “finders keepers losers weepers,” spilled out. It was your lucky day, someone had dropped a dollar or two on the ground and with no way to know whose it was, you claimed it as your own and stuffed it in your pocket. You trotted off to the candy store and immediately put that little windfall to good use. You felt rich and lucky for the day.
Today, “little windfalls” certainly can yield bigger returns than the candy store did if we know where to spend, or rather invest them. Should you find yourself with a cash reserve that you can hold on to for a while, consider a temporary investment that will allow you to earn as much interest as possible. Investment firms can help you with the specifics, but three of the most popular short-term investments are money-market funds, certificates of deposit, and Treasury bills.
Money market funds – A money market fund is a type of mutual fund that is required by law to invest in low-risk securities. These tend to be some of the most stable and safe investments. They provide a fixed return and carry a relatively low risk while still offering high returns in comparison to similar low-risk investments. During times of economic uncertainty or fluctuation, money market funds can provide a temporary financial shelter that allows you to watch the market and see what direction it is heading as well as where interest rates are going.
Certificates of Deposit - These are federally insured deposits issued by banks and savings-and-loan institutions and are available from most full-service investment firms. You can invest as little $1,000 for three months to 30 years. A CD is a special type of deposit account that typically offers a higher rate of interest than a regular savings account. Unlike other investments, CDs feature federal deposit insurance up to $100,000.
According to the US Securities and Exchange Commission, when you purchase a CD, you invest a fixed sum of money for fixed period of time – six months, one year, five years, or more – and, in exchange, the issuing bank pays you interest, typically at regular intervals. When you cash in your CD, you receive the money you originally invested plus any accrued interest. But if you redeem your CD before it matures, you may have to pay an "early withdrawal" penalty or forfeit a portion of the interest you earned.
Although most investors have traditionally purchased CDs through local banks, many brokerage firms and independent salespeople now offer them. And investors may now choose from a variety of CDs including variable rate CDs, long-term CDs, and CDs with other special features.
Treasury bills (T-bills) - These are sold in terms ranging from a few days to 26 weeks. The bills are sold at a discount from their face value. For instance, you might pay $970 for a $1,000 T-bill. When the bill matures, you would be paid $1,000. The difference between the purchase price and face value is interest. T-bills are sold in increments of $1,000, and the minimum purchase is $1,000.
According to the US Department of Treasury, you can bid for a bill in two ways:
- With a noncompetitive bid, you agree to accept the discount rate determined at auction. With this bid, you are guaranteed to receive the bill you want, and in the full amount you want.
- With a competitive bid, you specify the discount rate you are willing to accept. Your bid may be: 1) accepted in the full amount you want if the rate you specify is less than the discount rate set by the auction, 2) accepted in less than the full amount you want if your bid is equal to the high discount rate, or 3) rejected if the rate you specify is higher than the discount rate set at the auction.
Put the little “windfalls” to good use on a short-term basis and you’ll find you’re better prepared in the long-term.
Sally McKenzie is CEO of McKenzie Management. a nationwide dental management, practice development and educational consulting firm. Working “on-site” with dentists since 1980, McKenzie Management provides knowledge, guidance and personalized systems that have propelled thousands of general and specialty practices to realize their potential. Sally can be reached directly at 1.877.777.6151
Interested in speaking to Sally McKenzie about your management concerns? Email her at Sally@thedentistsnetwork.net