If you have some money saved in an account that earns 0.01% interest, you can invest it to make more money. You can invest in stocks or bonds, giving you a higher return than just leaving the money in the bank. Talk to a financial advisor to learn more about your best option.
Short-term investing is tricky. If you invest your money in the stock market, you could lose it all. But if you put your money in a traditional savings account, it won’t earn much interest. What should you do?
What is a short-term investment? There is no official definition because no governing body defines it. It’s up to each person to decide what they think is short-term or long-term. For me, short-term investment is anything I’m investing money I’ll need in fewer than five years.
If you want to start investing, one of our recommended choices is Wealthfront. They have a low minimum balance, low fees, and an easy-to-use interface. They’re an excellent option for getting started with investing quickly and easily.
The stock market usually doesn’t lose money over five years. But it can happen. Looking back at the 1930s and 1940s, you will see that there were times when the stock market lost a lot of value in 5 years. For example, in 1932, the stock market lost 60.9% in value over five years.
The stock market rarely goes down, and we can fix it in five years. Usually, it takes us at least five years to pull out of a significant stock market correction or a bear market. Of course, this is not always true. We could enter a bear market that takes ten years to recover from.
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The 10 Best Short-Term Investments
1. Lending Club
Lending Club is an excellent option with the potential for higher returns. This peer-to-peer lending platform makes it simple to invest in loans to individuals and businesses. It makes investing in loans to individuals and companies easy. It’s also perfect for short-term lending; the platform’s loans are for three or five years. Lending Club is a reasonable alternative if you know you won’t need the money until then.
When you invest in loans, you can get a higher return on your investment. However, this also means that there is a higher risk that you might not get your money back. Investing in a diverse range of loans is essential if one wishes to keep their exposure to risk to a minimum. It will help protect you if one of the loans goes into collections or defaults.
- It is straightforward to invest in a diverse loan portfolio.
- Potential for high returns in the short term
- Not FDIC-insured
- Cannot liquidate the loans early
- Potential for losses
2. Certificate of Deposit
Certificates of deposit (C.D.s) is an investments where you agree to leave your money with the bank for a set period. In exchange, the bank pays you a higher interest rate than you would get from keeping your money in a savings account. The longer you agree to save your money with the bank, the higher the interest rate you’ll receive.
However, there is a risk associated with C.D.s. You might have to pay a fee if you need your money before the term. That is why it’s essential to read the terms and conditions before signing up for a CD.
You can withdraw funds from a CD before it matures. For example, you could put money into a 5-year CD but withdraw it after the first year. But if you do this, most banks will charge you a penalty. The amount of liability varies depending on the bank and the type of CD.
That’s why keeping your money in a CD is best until it matures. That way, you won’t have to worry about paying the penalty. That is why choosing the length of the CD is so important.
You want to find a CD that offers a long term so that you can make the most interest. But you don’t want to pay the penalty if you take the money out early.
- FDIC insured
- From six months to five years or more, CD terms are available.
- Higher interest rates on longer-term C.D.s
- Can create a CD ladder
- Still relatively low-interest rates
- Penalty for early withdrawal
3. Investing With Betterment
Betterment is an exciting way to invest money. It’s not an investment, but it’s a company that makes investing in stocks and Bond ETFs easy. It can be used for various investments, including long-term retirement investing. But if you want to use it for shorter-term investments, you must get the asset allocation right.
Betterment lets investors choose how to split their money between stock ETFs and bond ETFs. For short-term investing, putting half of your money in stock ETFs and half in bond ETFs can protect you from losing money while also allowing you to make more money.
- Very easy to implement
- Money can be withdrawn at any time
- Potential for much higher returns
- Fees are very low
- Not FDIC-insured
- Potential for capital losses
4. Online Savings Account
If you’re looking for a place to save money, traditional banks offer very low-interest rates, as close to zero, as you can. However, some online banks offer better rates. Today’s top online savings accounts pay around 0.50%. Chime now offers an APY of 0.50%, which is competitive with the best online savings accounts available. Chime provides a fantastic online savings and checking account for savers.
Chime is a financial technology company, which means that it provides different services than a bank. Banking services and debit cards are provided by The Bancorp Bank or Stride Bank, N.A., both of which are members of the FDIC. Chime cannot guarantee when the IRS will send files or if funds will be available.
- FDIC insured
- Funds can be withdrawn at any time
- Rates better than a brick-and-mortar bank
- No monthly fees
- Interest rates are still low
- Inflation exceeds the rates
5. Municipal Bonds
Bonds have one disadvantage: taxes. Bond interest, as well as capital gains, are taxed.
Municipal bonds are one way to reduce the tax burden (known as “munis”). These bonds don’t have federal income tax and might not have state income tax either. Munis are an excellent option for people in higher federal tax brackets.
The SEC yield on this fund is lower than that on similar taxable bonds. However, it is essential to compare the yields on an after-tax basis. This fund currently has a yield of almost 2%.
- Potential for higher returns
- Tax advantages
- Easy access to funds without penalty
- Losses are possible.
- Those in lower tax brackets will be disappointed.
6. Short-Term Bonds
It would help to decide a few things when choosing a low-cost index mutual fund or ETF. You must determine if you want a fund that only invests in government bonds in the United States or one that also invests in corporate bonds. It would help if you also decided whether you want a short-term or intermediate-term bond fund.
Making decisions always entails trade-offs. Government bonds in the United States are more secure than corporate bonds, but they typically pay less interest. Short-term bonds are less vulnerable to interest rate fluctuations than intermediate-term bonds, but they also usually pay less interest. Short-term government bonds currently pay little more than an online savings account. For example, Vanguard’s short-term Treasury fund has an SEC yield of only 1.25%.
While intermediate-term funds may lose money in a given year, their performance is generally consistent. For instance, Vanguard’s Intermediate-Term Bond Index Fund (VBILX) costs just 0.07% and yields over 2.50%.
- While not FDIC-insured, it is still reasonably safe.
- Intermediate-term bonds can provide significantly higher interest rates than savings accounts.
- When necessary, funds can be withdrawn from the fund.
- Not FDIC-insured
- Can lose money
- Rates are historically low
Traditional bond funds have a disadvantage. They may suffer capital losses as the fund sells bonds to purchase new ones. If interest rates rise, the fund suffers a loss on bond sales.
Guggenheim’s Bulletshares are ETFs that offer a bond fund’s potential returns combined with a CD’s stability. With traditional bond funds, the management regularly sells bonds as they mature and replaces them with new bonds with a longer maturity. Bulletshares, on the other hand, have a fixed term of one to ten years.
Assets are returned to shareholders at the end of the term. It differs from C.D.s because shareholders can sell their ETF shares without penalty.
There are two types of Bulletshares: corporate bonds and high-yield corporate bonds. The first invests in investment-grade corporate bonds, which have a lower risk. The second type buys corporate bonds with a credit rating below investment grade. This type has a higher risk but also offers higher returns.
For example, the Guggenheim BulletShares 2020 High Yield Corporate Bond ETF has a current yield to maturity of more than 5%.
- Higher potential returns
- ETF shares can be purchased and sold at any time.
- Dates of maturity fixed.
- Not FDIC-insured
- Funds can lose money
Higher potential returns
ETF shares can be purchased and sold at any time.
Dates of maturity fixed.
- Very easy to implement
- Money can be withdrawn at any time
- Potential for much higher returns
- Fees are very low
- Not FDIC-insured
- Potential for capital losses
9. Worthy Bonds
Worthy Bond is a site where you can invest money in bonds from small businesses. The bonds are not guaranteed, but some are backed by collateral. You can invest as little as $10.
The Worthy Bonds mobile app helps you invest money. The app uses something called round-ups. The app takes small amounts of money from what you spend and puts it into your investment account. For example, if you spend $4.10 on a cup of coffee, the app will charge your account $5. It means that $4.10 will pay for the coffee, and $0.90 will go into your investment account. Once you have saved up $10 in round-ups, the funds can be used to purchase a bond through the app.
- Invest as little as $10.
- A $1,000 investment can be spread across 100 different bonds.
- Weekly interest is credited
- Your account is not charged any fees.
- Earn interest at a rate more than twice the rate of inflation.
- It pays only simple interest and does not compound for greater returns.
- You can invest 10% of your net worth, annual income, or $100,000.
Our final investment option is a novel take on online savings accounts. SmartyPig combines high yield with savings objectives. SmartyPig currently offers a high-yield savings APY of 1.55% as of August 2018.
With SmartyPig, you set specific savings goals. You can set multiple goals or just one. You then add to the account until you reach your goal. In this way, SmartyPig is ideal for short-term savers who want to save for a specific purpose.
- Potential for returns higher than most online banks
- It makes saving for a specific goal very easy
- Low rate compared to other options.
What is a Short-Term Investment?
If you're investing for a short period, you need the money soon. For example, if you're saving up for a down payment on a house or your wedding, you'll want to invest in something that will give you your money back quickly. Short-term investments last for less than three years.
You can look for investments such as stocks if you have a longer time horizon. Stores offer the potential for much higher returns. The stock market usually goes up 10% yearly over a long period but is very volatile. It means that sometimes the stock market goes down, but if you have a long enough time horizon, you can wait for it to return.
Short-Term Investments: Safe But Lower Yield
Short-term investments are less safe than long-term investments but can earn a higher return. If you invest for the short term, you will be limited to specific investments. You should avoid investing in riskier assets, such as stocks and stock funds.
Short-term investments can be helpful because they are often very liquid. It means that you can get your money back whenever you need it. They are also lower-risk investments than long-term investments, so you may not lose as much money if something goes wrong.
Factors for a Short-Term Investment
It is usually a good idea to wait for the good and bad times of the stock market since this will give you the best chance of earning a high return. Unfortunately, there may be times when you need to take action even if the stock market is unstable since other factors may be more important to you in that short time frame.
- Low Risk: If you need the money soon for another purpose, you should not risk it by investing in high-risk things. For instance, if you want to look for a house and make offers, you should not put your down payment in risky investments like cryptocurrencies.
- Liquidity: How quickly do you need your money? All deposit accounts immediately give you access to the capital, although some charge a penalty for early withdrawal. And some investments are more accessible to sell into cash than others.
- Stability: If you need your money back in the next six to twelve months, you can't wait for the stock market to correct. That means you should avoid hazardous investments that can go up or down quickly in value. Instead, look for more stable investments that will still give you a return on your money.
- Low Transaction Costs: Every time you move money in and out of an investment, you must pay transaction costs. These costs add up quickly. For example, rental properties come with really high closing costs when you buy and sell them. The longer you hold onto the investment, the less these costs impact your total returns. That's why people sometimes purchase and have properties for years or even decades.
- Hedge Against Inflation: If you don't invest your money, it will lose value over time. It is because of inflation. Every year, the value of cash decreases. Investing involves some risk, but it is worth it because you can make more money than if you just left your money in a checking account.
Top Tips For Investing Money For Five Years or Less
The process of investing for the short term is different than if you were investing for the long haul. If your time horizon is five years or fewer, use these tips:
- Set your expectations. Short-term investments usually have lower potential returns than long-term investments. You should expect this when deciding which investment is suitable for you.
- Focus on safety. It would be great if you focused on security rather than return. It means that your money will be there when you need it.
- An extra return may not be worth the additional risk. Short-term investments earn very little money, so some take on more chances to get a better return. But it would be best if you focused more on why you're investing for the short term.
- Pick an investment based on your needs. You can earn more money if you wait for the CD to mature, but what if you need the money before that? You should invest in a way that meets your needs.
- Not all short-term investments are equal. The FDIC backs bank products, so you will not lose any money if something happens. Although even market-based products, such as secure short-term bond funds, could experience a decrease in value over a brief period, it is best to be aware of and comprehend the potential risks associated with investing.
- Short-term investments are much safer than long-term investments. It is especially true for stocks or funds, which can be risky. However, you must understand what you are investing in before you do so.
Top Short-Term Investments
Cash Management Accounts
A cash management account is an account that is offered by a company other than a bank or credit union. Brokerage firms primarily provide them.
Cash management accounts are similar to standard checking accounts: they come with debit cards, checkbooks, and online bill payment services. They usually offer higher interest than traditional checking accounts.
Cash management accounts are helpful if you are an investor and have already opened an account with a brokerage firm. If you are investing a lot of money, it is beneficial to manage your finances and investment accounts in the same place. It will make it easier when it is time to file taxes. Most cash management accounts have services to help you make money from your investments and better manage your investment cash flow.
A Roth IRA
Roth IRA is a powerful way to save for your retirement. You can build financial stability and create a secure future by investing in this type of individual retirement account. With a traditional IRA, you don't have to pay taxes on the money you save, but you will have to pay off taxes when you take the money out. A Roth IRA is the opposite: you have to pay off taxes on the money when you save it, but you don't have to pay any taxes when you take it out.
It is a retirement account where you pay taxes when you put money in, but you don't have to pay off taxes when you take it out. It can be a good idea because you might have to spend less on taxes during retirement.
Roth IRAs do not pay simple interest. But if you open your Roth IRA account at a brokerage firm and have investments there, you can earn compound interest on the money in your account. It is a great way to increase the amount of money you have saved for retirement if you are an investor.
You can earn more money in the short term by having a Roth IRA at your brokerage firm. It is a long-term investment but can help you make more money quickly.
Floating Rate Funds
Floating rate funds are a type of investment that is discussed more. They are a good investment, but they are also risky. These funds invest in bonds and other debts that have variable interest rates. Most of these funds are invested in short-term debt. Usually, it takes 60 to 90 days - and banks and corporations issue most debt.
When interest rates are rising, floating-rate funds can do well. These funds have a lot of different bonds that change every 2-3 months. It means that the fund can take advantage of the better interest rates. And since the bonds usually have reasonable interest rates, the fund also pays out good dividends to its investors.
However, these funds are risky because many investors invest using borrowed money. It means they take on debt to invest in other debt. And most funds also invest in higher-risk bonds, seeking higher returns.
You must do this through a brokerage if you want to invest in a floating-rate fund. TD Ameritrade is an excellent choice for this. The common floating rate funds are:
- FLOT: iShares Floating Rate Bond ETF
- FLRN: Barclay's Capital Investment Grade Floating Rate ETF
- FLTR: VanEck Vectors Floating Rate ETF
- FLRT: Pacific Asset Enhanced Floating Rate ETF
Selling Covered Calls
Another way to make money in the short term is to sell covered calls on stocks you already have. When you sell a call, you get paid a premium by someone else. They give you the right to sell your stock at a given price. You keep the money and move on if the stock never reaches that price. But if the store goes that price, you have to sell your shares at that price.
In a flat or declining market, selling covered calls can be a good idea. It is because you can make extra money while reducing the risk of selling your shares at a lower price. Even if you do have to deal, you may be happy with the price you receive.
It would be best if you had a discount brokerage that offers this service to invest in options. TD Ameritrade has some great options trading tools available through their ThinkorSwim platform.
Pay Off Student Loan Debt
If you want a guaranteed return on your money in the short term, you can pay off your student loan debt. The interest rates for student loan debt vary from 4-8%, but many Federal loans have an interest rate of 6.8%. If you pay off your debt, you will see an instant return on your money of 6.8% or more, depending on your interest rate.
Even if you can't pay off your loan immediately, refinancing it is still an option - allowing you to lower interest rates and save some money in the long run.
Pay Off Credit Card Debt
If you settle your credit card liability, you can see an immediate return on your money. It is an excellent way to use cash to help yourself in the short term.
Few investments can equally return on paying off credit card liability. With the standard interest rate on credit card debt over 12%, you'll be lucky to make that much money in the stock market. So, if you have the money to spare, settle your credit card debt as quickly as possible.
If you're having trouble getting out of credit card debt, we recommend figuring out a plan and then using the right tool to help. You can prefer between the debt snowball and debt avalanche methods. Once you plan, look for a tool that will work best for you.
First, get your finances in order by using a free tool like Personal Capital. You can link your accounts and get a clear idea of where you stand.
Next, consider either:
- Balance Transfer: You could be eligible for a balance transfer credit card, allowing you to save money. Numerous cards provide an appealing 0% interest rate promotion on transferred balances for a designated period, allowing you to minimize your credit card debt as you make efforts to pay it off.
- Personal Loan: It might seem bad, but most people use personal loans to consolidate and manage their credit card debt. It is because you can get a new personal loan at a lower interest rate than you're paying on all your other cards. Then you can pay off all your other cards with the new loan. Now, you can pay an all-inclusive monthly fee and be done.
Is the Stock Market a Good Place to Invest for the Short Term?
Understandably, you might be curious about this. After all, when the market is rising, it can be painful to miss out on potential profits. But it’s important to remember that you can also lose money in a short period if the stock market goes down.
The public is an app that helps you invest in stocks. It is suitable for short-term investments because it doesn’t have fees. You don’t have to pay a commission when you buy or sell a stock, so you can move your money in and out of the market without worrying.
How to Manage Your Short-Term Investments
You can use Personal Capital’s free financial dashboard to track and analyze all of your investments, no matter where they are located. It will make it easier for you to track them and make intelligent decisions about your money.
With Personal Capital, you can connect your 401(k), 403(b), IRAs, and other investment accounts. By doing so, you can monitor the performance of your investments and determine whether your asset allocation needs to be adjusted.
Personal Capital also offers a Retirement Planner for free. This tool will show you if you are on track to retire successfully. If this is too complicated or something you do not want to do on your own, you may want to think about working with a financial advisor or investment advisor. We suggest visiting Paladin Registry, where you can fill out a form online telling them what you are looking for. They will email you a list of three highly-rated professionals that match your needs. From there, interview each one and choose the best fit.
Read more: How to Invest During a Bear Market
Frequently Asked Questions About Best Short-Term Investments
Some good short-term investment options are certificates of deposit, short-term mutual funds, commercial papers, government treasury bonds, money market accounts, etc. If you decide to hold an asset for longer than you originally planned, it can become a long-term investment.
401(k)s can lose money for various reasons. The stock market might be going through a rough patch, or you could have invested in a company/industry that- currently- is not doing so hot. Fees are also another contributing factor to lost 401(k) money.
A short-term investing or savings account is where you can put your money to get it when you need it quickly. You can also earn some interest on the money you put in the account. It is a good idea because today’s interest rates are higher than in the past.