Q: I will have approximately $50,000 very soon and want to earn as much money as possible within the next two years, and then buy a house. What do you recommend?
A: With a time-frame of just two years, you should forget about any securities that fluctuate in value or otherwise entail investment risk, because those would carry the possibility that your $50,000 would not be fully available when you are ready to buy a house.
That leaves you with the option of guaranteed, interest-bearing instruments. Unfortunately, yields in those vehicles--which can include everything from savings accounts to short-term U.S. Treasury securities--are quite low these days. However, with preservation of principal as your primary goal, these are the kind of financial vehicles you should be considering.
Two-year Treasuries are yielding only about 0.25 percent, and while a bond with a longer maturity will probably have a higher yield, it would also carry the possibility of being depressed in price within your two-year time-frame. You should be able to do better, and without the risk of price fluctuations, by focusing on deposit products.
Among deposit products, two-year CDs generally yield more than savings or money market accounts. You could actually consider CDs longer than two years in length, as long as the penalty for early withdrawal is reasonable. Those penalties are often only a couple months' worth of interest. Over the course of two years, you'd earn more in the average five-year CD, even after paying two months of interest in penalties, than you would in the average two-year CD. So shop for the best CD rates you can find, and if you can find one with a reasonable early-withdrawal penalty, consider longer-term CDs in your search too.
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