Intro: Best Short Term Investments
Long-term investments get the most attention. But there are many investors who are interested in short-term investments.
The difficulty with short-term investing is that you don’t enjoy the same buffer afforded by the time horizon of a long-term investment. As a result, if the money is needed within a couple of years of investment, there is the possibility of losing a lot of it during an economic downturn or if a few selected shares perform badly.
Depending on the amount of money to be invested, there are options for some of the best short-term investments individuals can take to grow their money relatively safely in a short period of time.
But first, let us quickly go over the often asked question: “what is short term investment?”
What Is Short-Term Investment?
So, what exactly constitutes short-term investments?
Exactly what the name says: any investment that is held for a short period of time (1-3 years) is a short-term investment.
When you are investing short-term, the assumption is that you will be liquidating those investments within one to three years, occasionally up to five years. As a result, your priority is to preserve your capital.
Benefits and Downsides (Short-Term Investments)
Preserving your capital means putting it in a low-risk investment. Instead of keeping your money sitting idly in a checking account at risk of being spent frivolously, you want to put it in a place where it will work for you.
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The best short-term investments preserve your money and provide some growth, all at a low risk. The downside is that low risk investments also mean low returns. Their relative safety means you won’t be making a killing off of them.
Consequently, when making an investment short-term, your end goal is not to experience substantial capital gains. People typically make short-term investments when tucking away their money for needs that will crop up sooner rather than later, like putting a down payment on a new house or buying a new car.
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The Best Short-Term Investments
What is the best short-term investment? The low risk and low return of investing short-term means that there is usually not much fluctuation in what the best short-term investments are. There are timely considerations people can make, particularly when it comes to interest rates, which will be addressed at the end of each short investment option below. When individuals are figuring out how to invest short-term for the first time, they typically turn to the most common methods, which you have likely heard about before.
Savings Account
In articles and conversations about investing, savings accounts are dismissed as the silliest place to invest your money. This is true – if we’re talking about long-term investments.
If you plunk your money in a savings account with the goal of using it when you retire (and your retirement is not for another forty years), not only is this unhelpful, but it can actually have a negative impact. The interest on savings accounts is not tied to inflation, which means the money you work hard to save will most likely be worth much less when you withdraw it later.
But when it comes to short-term investing, inflation is a very small consideration. The chances of there being enough inflation that your savings are not enough to buy groceries after two years are slim to none. Savings accounts are considered one of the best short-term investments if you want minimal risk and the ability to withdraw your money easily and at any time. Additionally, the Federal Deposit Insurance Corporation insures savings accounts for up to $250,000.
While the interest rates may be minimal, savings accounts are a government-guaranteed spot to park your money where they will still be doing more work than they would in a checking account. In fact, most people use savings accounts without thinking of it as short-term investing.
According to the FDIC, the average bank interest rate for savings accounts is a measly 0.06 percent. Not a very attractive number for those looking to put their money in savings. That said, some of the best short-term investments through savings accounts are done by those who spend time shopping around and comparing rates. Keep in mind there are also sliding interest rates depending on how much you plan on investing short-term – those who invest a larger sum of money benefit from a higher interest rate.
One option that those seeking the best short-term investments should consider is online banking. Online banks have savings accounts with interest rates as high as 1 percent. The reason for the gap between the interest rates of brick and mortar banks and online banks is that online banks have less overhead cost – since they are only based online – meaning they can afford to offer higher rates on short-term investments and other investments.
If you are hesitant to do short-term investing in an online savings account, consider the reason why. Is it because you simply like the option of banking in person or is it because you are worried about the safety of web-based banks? If it’s the latter, do your research into the bank. Additionally, if the savings account of an online bank is FDIC insured, your money is guaranteed should anything happen to the bank. After that, it’s as simple as practicing the same vigilance about your online banking information (account numbers, password, etc.) as you would with any financial institution.
When choosing a savings account for investing short-term, make sure you also take other important factors into consideration, like the minimum daily balance and any account fees.
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Savings Accounts in 2017: Still a safe bet, but the Federal Reserve does not seem to be planning to raise the interest rate, which means banks will continue offering small rates on savings accounts. As a result, if you’re looking for a high return on investment, parking your money in savings in 2017 is a safe short-term investing strategy, but not a very lucrative one.
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Certificates of Deposit (CD)
Nope, we’re not talking about the soon to be outdated music technology here, but another short-term investing option. CDs are similar to a savings account in that they are a safe bet, issued by commercial banks, and are guaranteed by the Federal Deposit Insurance Corporation. The biggest difference is that there are restrictions on withdrawing your money.
A certificate of deposit is generally one of the best short-term investments for safety and wealth protection. It is designed to encourage you to save your money. Whereas you can withdraw money from you savings account at any time, withdrawing money from a certificate of deposit before the date of maturity incurs a penalty. That’s to say that it isn’t impossible to access your money – you just pay a price.
Those interested in a certificate of deposit benefit from a fixed interest rate and can choose a certificate of deposit with terms ranging from a month to five years. What is the best short-term investment between a savings account and a certificate of deposit? That depends on your finances.
If you have built up a healthy emergency fund in addition to the money you are planning to use for short-term investments, then a certificate of deposit is your best bet. You will not need to dip into it for unexpected expenses. On the other hand, if the money you plan on investing is the only cushion you have, it’s best to keep it in a savings account to avoid paying penalty fees if you think you may need to dip into your funds occasionally.
Certificates of Deposit in 2017: The Federal Reserve is most likely to keep interest rates low in an effort to spur economic growth. If you’re planning to buy a house, this is great news for you since you will benefit from a lower interest rate, but if you are just looking for a place to keep your savings for short-term investing this is not so exciting.
That said, once the economy does get moving again, the Federal Reserve is likely to raise the interest rate to prevent inflation. This means that if you lock into a long-term certificate of deposit (say, four years) you are stuck with the interest rate you originally agreed to, despite more favorable rates. While it is hard to know how the economy will move in the next few years, if you’re wondering what is a short-term investment strategy for 2017 when comparing savings to certificates of deposit, experts say savings accounts are better. If interest rates go up, you have the flexibility of a savings account; if the economy goes bad and you need cash, you are able to easily withdraw your money without dealing with the consequences of withdrawing your funds from a certificate of deposit.
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Money Market Funds
Money market funds are also a safe place to park your money. They earn low returns for investors while maintaining a net asset value (NAV) of one dollar. Money market funds are highly liquid. Their low returns make them an unattractive option for people with long-term investing goals who are hoping to reap significant capital gains for something like their retirement. But they are a relatively safe place to park your money for investing short-term.
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The interesting thing about using money market funds when investing short-term is that they are always worth 1 dollar. What varies is their yield. They also do not charge fees for entering or leaving the fund. Some funds also offer tax-advantaged gains through strategic investments.
The Federal Deposit Insurance Corporation does not insure money market funds, which may be a deal breaker for some people looking for short-term investments.
Money Market Funds in 2017: Money market funds are considered a safe short investment, but they are largely dismissed as an option for long-term investing. In recent years, the interest rate on money market funds has only declined. Some investors use money market funds as a short-term investment for dividends from their stocks. While money market funds are an option in 2017, keep in mind that you will probably earn more from high-income savings accounts online since you could potentially experience zero return on money market funds.
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How to Invest Short-Term: Eliminate Expectations of High Returns
Short-term investing is a great option for those looking to protect their wealth for short-term goals. But be aware that short-term investments aren’t meant to reap significant returns. In exceptional cases, people make great stock picks and take a risk with a chunk of their needed money, but there are more instances of people losing big than winning big with such a strategy. The safest option for investments with a time period of one to three years is to do your research, consider the current economic climate, and find a safe investment vehicle. Savings accounts, although lambasted as a long-term investment strategy, can be the safest bet for how to invest short-term. Your money is insured by the government, and you can take advantage of high-interest savings accounts online to steadily grow your wealth.
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