Content of the material
- What Is a Short-Term Investment?
- 10. Peer-to-Peer Lending
- Short Term Investments Can Help You Achieve Short Term Goals
- Short-term investments: Safe but lower yield
- 7. Selling Covered Calls
- Get prepared if you’re planning to invest
- 8 Best Short Term Investments
- 1. Money Market Accounts
- 2. High Yield Savings Accounts
- 3. Short Term Bonds
- 4. Certificates of Deposit
- 5. Treasury Notes
- 6. Brokerage Account
- 7. Cash Management Account
- 8. Short Term Corporate Bonds
- You are leaving the Wells Fargo website
- How Short-Term Investments Work
- What Are the Best Short-Term Investments?
- What to Look for in a Short-Term Investment
- What makes a good short-term investment?
- The 10 Best Short-Term Investment Strategies for 2022
- 1. Savings Accounts
- 2. Corporate Bond Funds
- 3. Government Bond Funds
- 4. Treasury Securities
- 5. Money Market Accounts
- 6. Certificates of Deposit
- 7. Cash Management Accounts
- 8. Peer-to-Peer Lending
- 9. Roth IRA
- 10. Rewards Checking Accounts
- Who We Are
What Is a Short-Term Investment?
Short-term investments refer to assets that you can easily or quickly convert to cash, typically in less than five years, with many of them being sold within a year. If you have a project that you intend to convert to cash in a year or so, you already have a short-term investment.
It’s vital to keep in mind that every investor has their own investment goals and risk tolerance. What works for another investor may not work for you.
10. Peer-to-Peer Lending
Peer-to-peer lending is an alternative kind of personal loan. If you become a P2P lender, you’re essentially acting like a bank by helping people who wouldn’t otherwise qualify for a loan to borrow money. P2P lenders select individuals and extend microloans to them, who will later repay the loans with interest.
- Better rates, typically above average savings rate
- You can choose who to approve for a loan
- There is a risk of losing the investment
- Not as liquid as other options because you depend on your borrowers to pay back.
Short Term Investments Can Help You Achieve Short Term Goals
Short term investments typically won’t generate enough yield to draw a fixed income, but that’s often not the goal. Rather than keeping money in a checking account or savings account where its value will actually decrease (due to inflation), short term investing provides the opportunity to grow your money a little bit and avoid the short term risks associated with a long term investing strategy.
Short term investing often helps people keep their hands off their cash so it can be quickly liquidated to fund their next short term goal, like a big life event, new home, or new vehicle. A short term investing strategy can also provide a short term investor with an emergency fund or rainy day fund for those moments when life catches them off guard.
Looking for more short-term investment advice? Join our Infinity Investing workshop! Our investing experts share the best strategies for gaining lasting financial independence.
Short-term investments: Safe but lower yield
The safety of short-term investments comes at a cost. You likely won’t be able to earn as much in a short-term investment as you would in a long-term investment. If you invest for the short term, you’ll be limited to certain types of investments and shouldn’t buy riskier assets such as stocks and stock funds. (But if you can invest for the long term, here’s how to buy stocks.)
Short-term investments do have a couple of advantages, however. They’re often highly liquid, so you can get your money whenever you need it. Also, they tend to be lower risk than long-term investments, so you may have limited downside or even none at all.
7. Selling Covered Calls
The last “true” investment strategy that you can use in the short term is to sell covered calls on stocks that you already own. When you sell a call on a stock you own, another investor pays you a premium for the right to buy your stock at a given price. If the stock never reaches that price by expiration, you simply keep the premium and move on. However, if the stock does reach that price, you’re forced to sell your shares at that price.
In flat or declining markets, selling covered calls can make sense because you can potentially earn extra cash, while having little risk that you’ll have to sell your shares. Even if you do sell, you may be happy with the price received anyway.
To invest in options, you need a discount brokerage that supports this. TD Ameritrade has some of the best options trading tools available through their ThinkorSwim platform.
Related: Best Options Trading Platforms
Get prepared if you’re planning to invest
If it’s not time to invest yet, you may want to evaluate your financial priorities. One way is by using our My Money Map online tool — where you can track your spending, start a budget, and track savings in easy-to-understand charts.
8 Best Short Term Investments
If you’re looking to invest your money short term, we recommend these eight short term investment opportunities:
1. Money Market Accounts
A money market account pays a higher rate than a savings account, but usually requires a minimum investment. As it turns out, the interest rate might be slightly less than inflation, but that’s not going to be of much concern to someone who just wants a stable place to park their money for a short period of time. Make sure, however, if you are getting a money market account, that it’s FDIC insured for up to $250,000 in case of any unforeseen circumstances.
2. High Yield Savings Accounts
Banks do not typically offer most consumers the opportunity to benefit from a high yield savings account. However, in recent years, there are plenty of startup banks offering an online savings account with a higher interest rate than a customer would find in a traditional brick-and-mortar bank. Many times this is because the online bank has fewer operating expenses and can offer a better rate of return. What the bank gets out of this arrangement is that your deposit lends them cash (like any account at any bank), allowing them to invest that cash and grow their business.
3. Short Term Bonds
Buying a bond, or treasury securities, means you are loaning the government money. Bonds are considered the safest investment vehicle with the lowest amount of risk because they are backed by the promise of the United States government to pay them back.
Short term government bonds can be purchased directly from the US treasury, right on their website. Treasury bills (also known as T-bills) have maturity rates that range from a few days to 52 weeks. Your state government or local government may also sell short term bonds, like a municipal bond, to raise money for local projects. Though bonds are secure, their rate of return is fairly low. For instance, at the time of this article, the one-year T-bill rate of return just dipped from 0.06% to 0.04%. That equates to roughly four cents f0r every $100 loaned to Uncle Sam.
4. Certificates of Deposit
A certificate of deposit (CD), is similar to a savings account or money market account, but without an option to liquidate during its maturity. Essentially, you are loaning the bank that amount of money for a certain period of time, and agreeing not to take it back until the time you have agreed upon, whether that’s three months, six months, 12 months, or longer.
Generally, the interest rate the bank pays goes up the longer you agree to keep it in a CD. If you need to withdraw your money sooner, there may be penalties. CDs are FDIC insured, but the rate of return is lower than the stock market or even (usually) government bonds. CD rates are quite low right now, especially compared to the 1990s. While that could eventually change, most financial advisors recommend exploring other short term investment opportunities with more favorable rates.
5. Treasury Notes
Treasury notes involve loaning money to the government for a longer period of time than that indicated by a T-bill (mentioned earlier). T-note maturities range from two years to 10 years and pay interest every six months. Though the notes themselves have fixed periods of maturation, they can be bought and sold on the bond market, just like stocks, giving them a high degree of liquidity.
T-notes don’t have an exceptionally high rate of return, which is the price investors pay for their stability. At the time of this article, the yield on a T-note is still less than two percent, meaning that every six months Uncle Sam would pay you $2 for every $100 loaned, if it was loaned for 10 years. T-note rates do fluctuate, becoming more attractive at times. For example, T-notes with a 10 year maturity in the 1980s had a 15 percent yield.
Just like a short term bond, you can buy Treasury notes directly from the US Treasury website. You cannot buy treasury bonds on a secondary market, but you can buy into a bond fund, such as a mutual fund specializing in government bonds.
6. Brokerage Account
For someone who knows what they are doing in terms of buying and selling stocks, a brokerage account can be a decent place to grow money short term. Unlike a tax free retirement account, like a Roth IRA or 401(k), the stock and ETF assets can be liquidated without penalty (unless you make $50k in profit from liquidating your portfolio). Investors following this strategy would be wise to do some piggyback investing and copy people who know what they are doing, avoiding speculative stocks from unproven companies. Alternatively, following an index of Blue Chip, Fortune 500 companies, like Coca-Cola and Johnson & Johnson, reduces risk.
Because stocks are volatile, they are better as a long term investment that increases, on average, over time. However, if the market is good, a brokerage account may be a great short term venue for growing your cash.
Looking to create a retirement strategy? Schedule a consultation with an Anderson Advisor’s retirement planning expert today!
7. Cash Management Account
There are also robo-managed brokerage accounts (also known as cash management accounts) where money is invested in diverse assets and periodically re-balanced to minimize risk. One popular cash management account is Acorns, which allows you to select an investment strategy based on your financial goal and risk tolerance. You do not get to pick the exact type of cash equivalents (read: investment types) that comprise your investment portfolio, but you can pick whether the investment strategy is conservative or aggressive.
Aggressive investment strategies will direct the robo advisor towards stocks or corporate bonds, which are more volatile but have a much higher potential rate of return. A conservative strategy will put most of your investment portfolio in cash or government bonds, which are less volatile but offer less return. Either way, your investment portfolio can be easily liquidated within a few days. One of the most endearing features of cash management accounts is that they often link to your bank account or debit card and deposit rounded-off changes into the investment portfolio, which is a great way to grow your money without even thinking about it.
8. Short Term Corporate Bonds
Recall that a government bond is Uncle Sam’s receipt for loaning him money. As it turns out, businesses also sell bonds to raise money, in the form of a corporate bond. These corporate bonds are not backed by the promise of the U.S. government to repay them, so they are riskier. But in return for that risk, they offer a higher rate of return, historically between five and seven percent. The length of time they take to mature depends on the terms specified by the company.
If you don’t want to buy corporate bonds directly from a company (or don’t know how), and you want to mitigate the risk of sinking your money into one venture, you can buy an ETF or mutual fund specializing in corporate bonds. The opportunity afforded by corporate bond funds (instead of actual corporate bonds) allows you to buy into a diversified pool of corporate bonds from different companies, and is easier in terms of liquidating assets. This option is better for investors with a lower risk tolerance because if one company in the corporate bond fund goes under, there are plenty of others to balance out the investment and make sure it keeps growing.
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How Short-Term Investments Work
The goal of a short-term investment—for both companies and individual or institutional investors—is to protect capital while also generating a return similar to a Treasury bill index fund or another similar benchmark.
Companies in a strong cash position will have a short-term investments account on their balance sheet. As a result, the company can afford to invest excess cash in stocks, bonds, or cash equivalents to earn higher interest than what would be earned from a normal savings account.
There are two basic requirements for a company to classify an investment as short-term. First, it must be liquid, like a stock listed on a major exchange that trades frequently or U.S. Treasury bonds. Second, the management must intend to sell the security within a relatively short period, such as 12 months. Marketable debt securities, aka “short-term paper,” that mature within a year or less, such as U.S. Treasury bills and commercial paper, also count as short-term investments.
Marketable equity securities include investments in common and preferred stock. Marketable debt securities can include corporate bonds—that is, bonds issued by another company—but they also need to have short maturity dates and should be actively traded to be considered liquid.
What Are the Best Short-Term Investments?
Some of the best short-term investment options include short-dated CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills. Check their current interest rates or rates of return to discover which is best for you.
What to Look for in a Short-Term Investment
Over a long enough time horizon, you can wait out the ups and downs of the stock market’s gyrations. Your priority is simple: Earn the highest return possible.
But when you’re bound by a short time frame, other needs often trump returns.
- Low Risk. If you might need the money soon for another purpose, you can’t stomach much risk. For example, if you’re house hunting and making offers, you shouldn’t put your down payment in high-risk, speculative investments like cryptocurrencies.
- Liquidity. How quickly will you need to access your money? All deposit accounts let you access your money immediately, although some charge a penalty for early withdrawal. And some investments are easier to liquidate into cold, hard cash than others.
- Stability. When you need to pull your cash back within the next six to 12 months, you can’t wait out a stock market correction. That means you should avoid volatile investments that are subject to quick, violent swings in value.
- Low Transaction Costs. The more frequently you move money in and out of an investment, the faster transaction costs add up. For example, rental properties come with enormous closing costs both when you buy and when you sell. The longer you hold onto the investment, the less these costs impact your total returns — which is why people buy and hold properties for years or decades.
- Hedge Against Inflation. If you weren’t worried about losing money to inflation, you’d just leave your cash in your checking account. But ultimately, every dollar you leave in cash loses value each year. Investing money always involves some degree of risk, no matter how small. But when you fail to invest, you don’t risk loss; you guarantee it.
What makes a good short-term investment?
Good short-term investments may have many things in common, but they are typically characterized by the following three traits:
- Stability: Good short-term investments don’t fluctuate too much in value, as many stocks and bonds do. The money will be there when you need it, and is often protected by FDIC insurance or a government guarantee.
- Liquidity: A good short-term investment usually offers high liquidity, meaning that you can access the cash invested in it quickly. In the case of certain CDs, you’ll know when the money becomes available, and you can always redeem the CD, though it will often come with a penalty, unless you opt for a no-penalty CD.
- Low transaction costs: A good short-term investment doesn’t cost a lot of money to get into or out of, unlike a house, for example. That’s especially important when yields on short-term investments are at historical lows.
These features mean that your money will not be at risk and will be accessible when you need to use it, which is one of the major reasons to have a short-term investment. In contrast, you can earn a higher return on long-term investments but must endure more short-term volatility. If you need that money, though, you might have to sell at a loss to access it fully.
The 10 Best Short-Term Investment Strategies for 2022
Looking for the best investments for 2022 and beyond? Here are ten of the best short-term investment strategies that provide fast, lucrative returns with low risk:
Corporate Bond Funds
Government Bond Funds
Money Market Accounts
Certificates of Deposit
Cash Management Accounts
Rewards Checking Accounts
1. Savings Accounts
You might not have thought about a savings account as one of the best short-term investments, but it is. Think about it like this: when you put your money in a bank account, you’re basically giving a loan to the bank. That’s why you’ll earn interest on your accounts. A savings account can be a good short-term investment option if you’re going to hold a large amount of money in savings for 1 to 5 years.
Unfortunately, the average savings account yields a very small amount of interest. However, you could always open up a high-yield savings account and earn substantially higher interest.
A high-yield savings account is a type of savings account that typically yields 20 to 25 times the interest that a regular savings account does. It’s a great option if you’re:
Saving for vacation
Saving for a large purchase (like an automobile)
Putting money away for emergency funds
If you’re going to have money sitting in the bank account for a prolonged period, why not earn as much interest as you can?
A high-yield savings account might not have all the features that come with a standard savings account. In fact, online banks and credit unions typically offer savings accounts with the highest rates, which forces some people to hold their checking and savings accounts at different banking institutions. Thankfully, it’s easier than ever to make online transfers between different institutions.
It should also be noted that high-yield savings accounts often require that you make a higher minimum deposit and that you maintain a higher minimum balance.
2. Corporate Bond Funds
A corporate bond is a type of debt security that’s sold to investors and the second on our list of the best short-term investments. Large companies issue them to raise money for any number of purposes.
You might be asking yourself, “What’s the difference between a corporate bond and a corporate stock?” A stock is a share of the company that gives the investor a small degree of ownership. The investor receives dividends on the stock, and the stock may experience a rise or fall in value depending upon the company’s success.
A corporate bond is more similar to a loan. The company will pay back the investor for the amount paid, and there’s usually a pre-established interest rate and maturity date.
A corporate bond is considered a safer investment than a stock because the investor will most likely get his or her money back, plus interest. Stocks are riskier because they may never increase significantly in value, and there’s no clear indication of the best time to sell the stock.
A corporate bond is only at risk if the company collapses. But even so, the company’s assets are typically used as collateral so there’s a better chance your losses would be reimbursed. So far as short-term investing goes, you can find corporate bonds that mature in three years or less.
3. Government Bond Funds
A government bond is similar to a corporate bond, but it’s issued by the government rather than a corporation. Like a corporate bond, a government bond is considered a low-risk investment. In fact, government bonds issued by the U.S. Treasury are considered to be some of the safest bonds in the world and among the best short-term investments.
Because of their low risk, government bonds typically pay low interest rates. However, they’re optimal because they’re exempt from state and local taxes (bonds from foreign governments are not), and you can even find government bonds that pay interest periodically rather than at the maturity date.
Here’s the icing on the cake: you can take great pride investing in government bonds. Most government bonds are used to fund helpful domestic programs, infrastructure projects, parks, and an array of other public services. They’re a feel-good investment for the patriotic investor.
4. Treasury Securities
We mentioned treasury bonds in the last section, but two other types of treasury securities are equally safe and desirable. The differences lie mostly in the range of maturities.
The T-Bill has the shortest maturity range of all the treasury securities. Typically, treasury bills have terms of 4 weeks, 8 weeks, 13 weeks, 26 weeks, or 52 weeks.
T-Notes have maturity terms that range from 2 to 10 years. These securities pay interest semiannually.
T-Bills and T-Notes are arguably the best treasury securities for short-term investing. But you can couple those investments with longer-term treasury bonds and earn short-term, medium-term, and long-term profits.
5. Money Market Accounts
A money market account is a type of bank account that is basically a hybrid between a checking account and a savings account. Unlike a regular savings account, a money market account typically allows you to write checks and use a debit card, and it also offers higher interest. Government regulations limit you to six withdrawals per month.
You might consider opening a money market account if you want to enjoy the flexibility of a checking account with the higher interest of a high-yield savings account. It could also be an optimal bank account if you’re a retiree—you could deposit your retirement funds in the account and use it to pay some bills.
Banks and credit unions offer money market accounts. Like a high-yield savings account, a money market account has stricter requirements than the average savings. But you can have your money market account insured, so it’s a very safe investment.
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6. Certificates of Deposit
A certificate of deposit (CD) is an account in which you deposit a large sum of money and leave it untouched for an extended period of time. In return, you’ll earn a premium interest rate. However, you’ll be charged a penalty for early withdrawal.
The best CD interest rates are much higher than any savings or money market account. It might be a good option for you if you’re saving for an extended period of time—maybe you’re saving for a down payment on a home, or a new car, or a trip around the world. If your money is going to sit in the bank for a long time, you might as well get as much interest as possible and boost your earnings.
CD terms vary, and you’ll find ones that range from 6 months to 18 months, or even longer. Most CD terms fall within the short-term investing range. So long as you’re disciplined with your money and don’t make an early withdrawal, a CD can be a great way to put your savings fund to work for you.
7. Cash Management Accounts
A cash management account is an account that’s offered by an institution other than a bank or credit union. They’re mostly issued by brokerage firms.
Most cash management accounts are similar to the standard checking account: they come with a debit card, a checkbook, and online bill payment services. And they usually offer higher interest than the standard checking account.
Cash management accounts are really only helpful if you’re an investor and have already opened an account with a brokerage firm. If you’re making investing a significant part of your income, you’ll enjoy being able to manage your personal finances and your investment accounts at a single institution. And when it’s time to file taxes, you’ll have fewer statements and documents to gather.
Furthermore, most cash management accounts have services that will help you maximize the profitability of your investments and manage your investment cash flow.
8. Peer-to-Peer Lending
Peer-to-peer lending is when an individual takes a loan from another individual—no middleman involved. P2P lending is also known as “social lending” and “crowdlending,” and it’s a relatively new type of investment opportunity that’s only existed (in a formal capacity) since 2005. There are many websites that facilitate P2P lending.
You’ll open an account with a P2P lending site and deposit a sum of money that’ll be used in your loans. Loan applicants create their own profile and will get matched up with you. Most P2P lending sites are fairly good at assigning some kind of “risk rating” to an applicant that can help you determine which loans are best for you to grant.
A P2P account may be a good alternative to a savings account because it usually generates higher interest. There is, of course, a risk of default so you should choose your applicant carefully and reevaluate your risk tolerance before you grant a loan.
For short-term investing, try and grant loans that mature within 5 years.
9. Roth IRA
A Roth IRA is a type of individual retirement account (IRA) that’s used to hold retirement funds. With a traditional IRA, your contributions are tax-deductible, but you’ll pay taxes when you start making withdrawals. A Roth IRA is the opposite: you pay taxes on your contributions, but your withdrawals are tax-free.
A Roth IRA is generally considered a better retirement account than a traditional IRA. Sure, you’ll have to pay more taxes with each contribution. But when you finally reach retirement age, you won’t have to pay anything on your withdrawals. It could lessen your financial burden during retirement.
Roth IRAs don’t pay simple interest. But if you open your Roth IRA at a brokerage firm in which you have investments, your account can earn compound interest based on the interest and dividends of your investments. This is a great way to significantly boost your retirement funds if you’re an investor.
While a retirement account is generally a long-term investment, you can increase your account earnings in the short-term by maintaining a Roth IRA at your brokerage firm.
10. Rewards Checking Accounts
Not all checking accounts are made the same. Some of the lucrative checking accounts you’ll find include:
Interest-Bearing Checking Accounts: These typically have a high minimum balance requirement, but they generate high interest.
Premium Accounts: Premium checking accounts also require a high minimum balance, but they’ll typically offer some worthwhile services (financial advice or discounts) or rewards points you can redeem for products and services. Some of these discounts and rewards can save you lots of money. And saving is earning, isn’t it?
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