- Short-term investments are available in a variety of forms, from high-yield savings accounts to bond funds.
- Investments with a shorter timeline can be safe, but some may be more vulnerable to market fluctuations.
- The best short-term investment for you should reflect your risk tolerance, liquidity needs, and overall financial health.
- Why would I consider a short-term investment?
- What steps should I take before investing?
- What are the best short-term investments?
Why Would I Consider a Short-Term Investment?
When it comes to investment strategies, the buy and hold approach is popular and espoused by financial wizards like Warren Buffet. This strategy means that an investor buys stocks or other securities and keeps them for the long haul, regardless of ever-changing market conditions. The main benefit of the buy-and-hold strategy is that long-term investments can weather short-term fluctuations in the market and eventually rebound. In turn, investors can typically expect steady returns over time.
While long-term investments like a 401(k) should be part of your overall financial narrative, short-term investing offers real value for money you want to grow and use in under three years.
If you have money sitting in your checking account, for instance, you can move it into a short-term investment. Even if you choose a very safe but low-return option, your money is still growing – which it would never do just by sitting in a checking account.
What Steps Should I Take Before Investing?
First, take a hard look at your income and debts. Do you have any high-interest debt sitting on your credit cards? It’ll be much better for your overall financial health to settle those debts instead of banking on the modest returns from a short-term investment.
Consider your unique financial situation before jumping into a short-term investment – these aren’t get-rich-quick schemes. It’s also a good idea to understand your goals for your short-term investment. Ask yourself the questions below to guide you to the right choice as you read over some of your options.
- How easy is it to liquidate the investment into cash?
- Will I need access to my funds, or do I plan to park my money untouched until maturity?
- Do I want the term length under a year, a few years, or five years?
- What is the expected return for this type of short-term investment?
What are the Best Short-Term Investments?
Choosing the best, safest short-term investments means passing on investments that might offer higher returns, but at a much higher risk of losing your money. Below are a few examples of short-term investments that can help you grow your wealth, without putting your money at undue risk.
High-Yield Savings Accounts
Although many banks don’t offer any payment for keeping your cash in a particular account, some provide annual percentage yields (APYs) as high as 2.5%. High-yield savings accounts won’t deliver the same kind of returns you might see with stocks, but it’s still growth for no risk up to the FDIC-insured limit of $250,000.
Certificates of Deposit (CDs)
Certificates of deposit or CDs are FDIC-insured accounts where your money must remain untouched for a set period, from a few months to a few years. The longer it takes for the CD to mature, the higher the interest.
At the end of the CD term, the bank opens a window to access your funds plus interest. In some cases, you’ll only have a short window of time to access your money before it’s rolled into another CD. So, read the terms and conditions to understand the timing. CDs come in different maturity lengths, so you can pick one based on how long you want to park and grow your money. Once a CD matures, you can renew it or cash it in.
Unfortunately, stiff financial penalties apply if you withdraw your money early, so it’s critical to avoid putting your emergency fund into one. Keep your rainy-day fund in your savings account, where you can use it at a moment’s notice.
Money Market Accounts (MMAs)
A money market account is like a high-yield savings account, but it requires a minimum deposit and limits withdrawals. Withdrawal restrictions vary but may limit how much you can withdraw each month, how often, or both. While MMAs don’t allow you to cash out all at once, you still have more flexibility than a CD.
The FDIC insures many money market accounts, and they’re a safe way for beginners to try their hand at investing.
Short-term bonds come in a wide variety, but the most promising for short-term investments are low-cost index mutual funds and ETFs. When it comes to short-term bonds, you can purchase a fund that invests in government bonds or corporate bonds. Government bonds aren’t FDIC-insured, but they’re still considered very safe.
Corporate bonds are also not backed by the FDIC. While they also tend to be safe, they do present more credit risk than government bonds.
In general, short-term bonds usually have a lower interest rate risk because of their shorter maturity. So, if the interest rate drops or increases, it won’t impact the price of the fund dramatically.
Treasury bills are a type of short-term bond sold by the U.S. Treasury with maturity periods that can be just a few days up to a year. Similar to a CD, the longer the maturity period of a T-Bill, the higher the interest.
When you buy a T-Bill, you’re purchasing it for lower than its face value. So, if you buy a T-Bill that pays you $2,000 when it reaches maturity, you might buy it initially for $1,900. The Treasury pays you $2,000 when it matures. Unfortunately, these are among the lowest-paying short-term investments, but they still can beat certain CDs, money market accounts, and savings accounts.
Short-Term Investing, One Dollar at a Time
Investing your money is a great way to grow your wealth. With options like money market accounts or even high-yield savings accounts, there are a wide range of choices for every kind of investor. With that said, it’s important to take the time to develop your financial literacy and understand the terms and conditions of the investment you choose. And don’t just ignore your investment once you’ve parked your money there. Read your statements, look for notifications, and keep track of maturity dates. By monitoring performance, you’ll get a bird’s eye view of your progress toward your financial targets