8 Best Short Term Investments
- Money Market Accounts
- High Yield Savings Accounts
- Short Term Bonds
- Certificates of Deposit
- Treasury Notes
- Brokerage Account
- Cash Management Account
- Short Term Corporate Bonds
What Are Short Term Investments?
This definition is a little bit more inclusive than determining the difference between short and long term investments according to the IRS and their threshold for capital gains tax. Short term capital gains tax is levied on profits made on assets held for less than one year, while long term capital gains tax is levied on profits made on assets that were held for more than one year. That said, an investment held for two or three years is still regarded as a short term investment.
Short term investments offer retail investors (and professional investors) a place to park their money where it can grow, but where the investment can also be quickly liquidated in case they need the funds. When inflation is high, a short term investment offers a hedge against the declining value of money. And for some consumers, parking the money in a short term investment also prevents them from spending it before they need it for a life milestone, whether that’s college, a wedding or a new home.
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.
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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.
Who Should Consider Short Term Investments?
Short term investments are great for individuals with extra cash. The truth of the matter is that ever since U.S. Federal Reserve (America’s central bank) and the U.S. Government severed paper money from a gold standard, our fiat currency has been losing value year after year. This means that socking your money away in a savings account for the long term is a losing investment.
Take this as an example: if you socked away $1k every month into a savings account for 40 years, you would end up with $480k in cash, plus interest. More often than not, however, bank interest rates are lower than inflation, meaning your cash is actually losing value. By contrast, the same amount put into the stock market (which has had an average rate of return of 10 percent over the last 50 years) would yield a whopping $6+ million (and probably an early retirement).
In any case, long term investments, like the stock market, sometimes have a higher degree of volatility. And generally speaking, the higher the rate of return or return on investment, the more risk there is. Short term investments sometimes carry a lower rate of return, but afford more stability, which is great for individuals who want to make sure their cash is still there after a few months or few years. And since many short term investments will likely yield profits less than $50k, they can serve as tax free investments as well, avoiding capital gains tax.
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.
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