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Are you looking for the best way to invest a little or a lot of money in the short term? You’re not alone.
Many people are searching for the best short-term investments to either park their cash or start investing with a small amount of money.
Getting high returns in a short amount of time without much money is quite tricky, especially if you do not want to risk losing any. Still, earning a little something is better than nothing at all.
Make sure you define your time-frame and investment goals before deciding where to store your funds or invest.
Below are the best short-term investments for any amount of money and for just parking some cash.
High-Yield Savings Account (HYS)
Is a savings account an investment? Sure it is. A high-yield savings account will have a better interest rate than your typical savings account, but the returns will still be small.
Pros and cons of using a high-yield savings account:
- Secure. Your money is safest in a savings account. FDIC insurance is standard with most banks, so you won’t need to worry about losing money (up to $250k).
- Ease of use. You do not need any intensive investment knowledge to take advantage of a high-yield savings account.
- Liquidity. You can quickly take your money out whenever you need it. However, there is a max of six withdrawals a month per regulation D.
- Small return on investment. You will barely be able to keep up with inflation. Don’t expect to make a lot of money with a high-yield savings account.
- Boring. Your money sits there, earning next to nothing.
A high-yield savings account is the best choice if you need to access your money quickly and can’t afford to lose a dime of it. It is an excellent choice for an emergency fund or a down payment on a home.
There is a large selection of online savings accounts to choose from. The most popular one seems to be Ally. Be sure to choose one that doesn’t charge any unnecessary fees and is FDIC insured.
Money Market Account
Another savings account that isn’t often thought of as an investment. A money market account is a safe place to keep money in for the short term.
It is often confused with a money market mutual fund, which is a group of short-term and low-risk investments that act similar to a cash account.
A money market mutual fund will be offered by a brokerage, while a money market account is provided by a bank or credit union.
Pros and cons of a money market account:
- Secure. Just like high-yield savings accounts, your money is safe (up to $250k), and FDIC insured if it’s at a bank and NCUA insured if it’s at a credit union.
- Ease of use. All you need to do is contact your financial institution and open one.
- Liquidity. Your money can be withdrawn at any time. You are still limited to six withdrawals a month, like a savings account.
- Deposit Minimums. Depending on the financial institution, you may need to have a certain amount invested to open a money market.
- Potential Fees. This also depends on the financial institution. There could be fees associated with maintaining or opening a money market account.
- Low returns. Your money won’t earn much in a money market account.
A money market account is a good choice if you don’t want to set up an online savings account. If you are looking to keep cash in your brokerage account, check and see if they offer a money market mutual fund.
Certificate of Deposit (CD) AKA Term Deposit
A certificate of deposit (CD) will guarantee your money earns a set interest rate throughout the duration of the term. Your money is locked in for 3, 6, 12, 18 months or 2, 3, 5 years depending on the term you choose.
Breaking a certificate of deposit usually results in losing any of the earned interest. However, there may be additional penalties depending on the financial institution.
Pros and cons of a certificate of deposit (CD):
- Secure. Banks and credit unions insure your money (up to $250K), so you don’t have to worry.
- Ease of use. Call up your bank or go online and open one up. Easy peasy.
- Better returns. You can usually get a better yield with CDs; the longer the term, the higher your return.
- Your interest rate is guaranteed. If interest rates go down, yours won’t change.
- Choices of terms. You can choose the best time-frame that works for you, and you can create a CD ladder that uses many different terms.
- Penalties on early withdrawals. If you end up needing your money before the CD matures, you will have to pay a penalty to withdraw your funds.
- A minimum deposit amount may be required. This will vary depending on which bank or credit union you use.
- Interest rates are still pretty low. You won’t make much more versus using a high-yield savings account.
- Your rate stays the same. This is a pro if interest rates are going down, but if they begin to rise, you could miss out on higher returns.
Certificates of deposit require more commitment than a savings account and are less liquid. If you are confident you won’t need the funds throughout the term, it’s an excellent choice.
Treasury Inflation-Protected Securities (TIPS)
Treasury inflation-protected securities (TIPS) are a type of US Treasury bond created to guard investors against inflation. Their value adjusts according to the inflation measured by the Consumer Price Index (CPI).
Pros and cons of Treasury inflation-protected securities:
- Secure. TIPS are backed by the US government and are less risky than non-government bonds. However, TIPS isn’t quite as safe as a savings account or term deposit.
- Interest paid twice a year.
- The interest rate is fixed, and the principle adjusts with inflation.
- Inflation protection.
- A TIPS bond will lose value if inflation decreases (deflation).
- Taxes. The interest earned and any increase in face value is taxable.
- Meager returns. You won’t earn much holding TIPS.
TIPS are an interesting investment. They are an excellent way to diversify a short-term portfolio.
Consider looking into a TIPS exchange-traded fund (ETF). A TIPS ETF may help you pay fewer taxes, and they’re easier to buy and sell.
Short-Term Municipal Bonds (Munis)
Municipal bonds are issued by local governments to help finance community expenditures like schools, roads, and more.
They offer tax-exempt benefits, decent interest rates, semi-annual interest payments, and they are less risky than corporate bonds. You’ll need a brokerage account to invest in municipal bonds.
Pros and cons of Municipal Bonds:
- Tax Exempt. Most municipal bonds are exempt from federal taxes and state taxes.
- Moderately secure (US bonds). Safer investment than most corporate bonds and other riskier investments.
- Easy to liquidate. If you want to pull your cash out, you can sell the bonds at any time without penalty (excluding any broker fees or capital gains tax).
- Better returns. You can get higher interest rates than TIPS or a savings account.
- Variety of choices. There are long, medium, and short-term municipal bonds to choose from.
- There is more risk involved with municipal bonds versus TIPS or a savings account. It’s unlikely the bonds will default but it’s still possible.
- Risk of loss. The price of the bond can go up or down, so you may have to take a loss if and when you need to sell.
Municipal bonds are perfect for those who want to generate some tax-exempt side income. It’s also pretty cool to know your investment is helping out local communities.
Munis are low-risk but not risk-free, you can lose money investing in them. You may want to consider buying municipal bond ETFs or mutual funds for better diversification.
Exchange-Traded Funds (ETFs)
An exchange-traded fund (ETF) holds a basket of different assets. They can consist of stocks, commodities, bonds, and more.
An ETF is traded just like a stock on a public stock exchange, meaning you can buy, sell, and transfer ETFs with ease. To invest in ETFs, you’ll need to have a brokerage account.
Pros and cons of ETFs:
- Easy to diversify. When you buy an ETF, you are purchasing hundreds or thousands of different assets.
- Potential for high returns. This all depends on which ETFs you buy and your investment strategy, but some can yield great returns.
- Liquid and flexible. Easy to sell and move your money.
- Low cost. The expense ratio for ETFs is usually much lower than most mutual funds.
- Higher risk. For short-term investing, an ETF may be a poor choice if your risk tolerance is low.
- Taxes. You will have to pay taxes on any dividends and or gains.
- Fees. There are plenty of low-cost ETFs, but the costs, even on low-expense ratio ETFs, can put a dent in your profits.
Exchange-traded funds offer a lot of ways to manage risk and diversify a portfolio.
The fees charged by an ETF are comprised of management and operating costs for the fund. They are automatically taken out of your return.
Stocks can be a worthy short-term investment if you know what you are doing and can stomach potential losses. With enough due diligence and proper diversification, you can make successful short-term investments in stocks.
Like the other mentioned investments, you will need a brokerage account to buy stocks.
Here are the pros and cons of stocks:
- Potential for sky-high returns. You can make way more investing in stocks than bonds, savings accounts, ETFs, etc.
- Easy to liquidate. It’s easy to cash out and sell stocks whenever you need the money.
- Exciting. Stocks are fun, and you can learn a lot from investing in them.
- No fees. Most brokers offer commission-free trading, and stocks do not have operating expenses like ETFs.
- High risk. Even the most stable companies aren’t free from risk. Investing in stocks, especially as a short-term investment, can be difficult.
- You’ll need to know what you are doing. Buying stocks involves spending time researching and performing fundamental analysis.
- Taxes. Dividends, capital gains, etc. (more complicated tax returns).
Consider investing in dividend stocks, you can gain income when the stock price rises along with dividend payments.
If you are new to investing and can’t afford to lose the money you want to invest, then stocks are a poor choice as a short-term investment.
The unpredictability of the stock market means risk, and even the pros can lose.
Peer-to-Peer Lending (P2P)
Peer-to-peer lending connects borrowers to investors without a traditional financial institution. You can invest in portions of loans, the entire loan amount, and invest in multiple loans.
You’ll need to create an online account with a peer-to-peer lending platform. Some popular P2P lenders include Upstart, LendingClub, Peerform, and Prosper.
Pros and cons of peer-to-peer lending:
- Better returns. It’s possible to get an average annual return of 4%-8% or more.
- Easy to do. Opening an account is quick and easy.
- Invest with little money. Some platforms allow investments as low as $25.
- You can lend money to multiple people or businesses.
- More risk. You’re the lender, and if the borrower doesn’t pay back the loan, you can lose your investment.
- Fees and expenses. P2P lending platforms may charge additional fees that can minimize your returns.
- Returns could be better. Considering the risk, the returns aren’t as good as other investments.
Peer-to-peer lending is still a relatively new concept. Many people swear by it, and others haven’t had the best experiences.
If you’re interested in investing in P2P loans, make sure you shop around and compare platforms to find one that works best for you.
Physical gold and silver are considered more of a long-term store of wealth and not an investment. But that depends on who you ask.
Buying precious metals could turn out to be an excellent short-term investment for those that are not interested in stocks and bonds.
You can buy gold and silver online or at a local coin shop. You can also invest in gold and silver ETFs, but isn’t it better to actually hold it?
Pros and cons of precious metals:
- Medium risk. The price of gold and silver doesn’t usually have extreme fluctuations in price like stocks.
- Protects against inflation. Gold has shown to be an excellent way to store your wealth and protect it from inflation.
- Diversification. Owning some physical gold and or silver broadens your investment portfolio.
- Fun. Owning gold and silver is a more exciting investment than opening a savings account.
- Storage. You will need to have a safe place to store your precious metals.
- Premiums. Dealers will charge a premium on top of the spot price. This can make it challenging to make money on gold or silver.
- Harder to liquidate. You will need to sell your gold to another person or dealer, which takes time and can include additional costs.
Buying gold and silver as an investment is speculative. You can lose money if the price of the precious metal drops and never recovers.
You will need to do research and make sure precious metals fit your risk tolerance and investment time frame.
Paying Off Debt
If you have debt, paying it down might be the best short-term investment you can make. The cost of debt could outweigh any potential returns from other investments.
Think about it this way; if you have to pay 10% interest on money you owe, you’ll need to make a return higher than 10%, not the easiest to do, especially in the short-term.
Pros and cons of paying off debt:
- Less monthly payments. After you pay debt off, you’ll free up cashflow.
- High returns. The interest rates you’re paying are likely higher than most short-term investments.
- Easy to do. You won’t have to spend time researching stocks etc.
- Gets you closer to becoming debt-free.
- Could improve your credit score.
- Boring. It doesn’t feel like you are investing, but it’s a financially wise thing to do.
- It may not be worth it. If you have interest free or super-low interest rates on your debt, you can get better returns elsewhere.
Take a closer look at your debt obligations and find how much of your money is going towards interest.
9 out of 10 times, it’s best to pay off your debt before investing. The most prominent exception is low-interest-rate loans like a mortgage.
If you need access to your money in less than five years, that’s considered short-term investing. The longer you can invest, the better your odds of making a successful investment.
Keep in mind, making any income results in owing taxes, with the exception of interest earned from municipal bonds. (Even then, you may still pay taxes depending on your state and the bond you invest in.)
The higher the risk, the higher the reward. The only safe investments are typically those that only offer low returns.
Start small and diversify over time. Preserving your wealth is just as important as growing it.