Best Ways To Invest Money in the Short-Term
Everyone wants to make money in the shortest amount of time, with the smallest amount of effort. Maybe you need money for a down payment on a house, or perhaps you’re planning a big vacation. Regardless of why you need money short-term, investing can help you earn the money you need. If you’ve never invested money before, it can be easy to fall into get-rich-quick schemes that never end up paying out. Here, we’ll explain the best ways you can invest your money short-term to realize the best returns.
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What Are Short-Term Investments?
While there is no set definition for a short-term investment, such an endeavor typically lasts for five years or less. Some short-term investments are high-risk, others are low-risk. The stock market can be volatile in the short term, and therefore high-risk, but short-term investors count on the fact that stocks are a liquid investment they can easily convert into cash. For low-risk short-term investments and securities, most investors rely on CDs, money market accounts, Treasury bills, and bonds.
Short-term liquidity — the potential of an investment or security to be converted to cash quickly — is the primary criterion for short-term investments. There are certain short-term stocks and bonds that can be cashed in quickly, and there are investment accounts tied to industries that produce reliable short-term yields, such as the beef industry. Beef sellers have the option to sell quickly, and there is no influence from buyers when it comes to the price of the calves.
Best Short-Term Investment Options
Where you invest your money matters, but how do you choose? The type of investment that is best for an individual varies from person to person. The best type of investment is specific to an individual’s intended timeline, risk tolerance, funding, and investing experience. Below is a breakdown of some of the best short-term investments.
Money Market Account
Money market accounts are an excellent short-term investment option for new investors looking to build up cash. Like a savings account, money market accounts are a place to grow money at higher rates of interest. As such, they have higher minimum balances.
Money market accounts are at risk of inflation, which can ultimately diminish the purchasing power of the dollar and the value of money market funds if the rate of inflation exceeds the interest rate.
While money market accounts are relatively liquid, you are limited to the number of withdrawals made in a month, and you can’t go below the minimum balance without paying a penalty. Additionally, the investment in a money market account is only secured up to $250,000. If you surpass that amount, some of the principal could be lost.
Peer-to-peer lending makes it possible to receive a personal loan without a bank. As a lender, you can invest in making loans to others at low-interest rates to earn short-term returns. There is a greater risk with this type of investment, as you have to rely on a borrower to not default on their loan. Returns may be higher with peer-to-peer lending when compared to other short-term investments. This peer-to-peer loan calculator can help you determine what your return will look like.
Exchange-Traded Fund (ETF)
Exchange-traded funds are a collection of securities, such as stocks, commodities, or bonds. ETFs usually track a certain index, but they can be invested in a variety of sectors. They are similar to mutual funds and bought and sold throughout the day just like stocks are. When compared to buying stocks individually, ETFs have a lower expense ratio and fewer broker fees, making them more accessible to a variety of investor types.
Another peer-to-peer exchange, Lending Club allows you to invest in loans made to individuals and companies. Loans last for a period of three to five years, accruing interest all the while.
Because these loans have such a high rate of return, this type of short-term investment comes with higher risk. Loans can default or go into collections and they’re not FDIC-insured. Additionally, they cannot be liquidated early, so funds are tied up for the term of the loan. Despite those cons, it’s very easy to invest in a diverse loan portfolio and you could stand to earn a substantial return.
Certificate of Deposit (CDs)
CDs are bank deposits sold on maturation terms most commonly lasting one, three, or five years. Deposits are placed in a savings account that earns fixed interest. Interest is paid on behalf of the bank annually or semi-annually. CDs purchased through a bank are insured for up to $250,000, which makes them an extremely safe investment.
Once the investment matures, it can be removed with the interest it has accrued. When it comes to liquidity, the only drawback with CDs is that there is a charge for removing funds early.
Municipal bonds are loans to the government that earns interest. Because they are issued by cities, states, counties, and other local forms of government, the interest paid on municipal bonds is tax-free.
There are general obligation bonds, which the borrower must repay with current tax revenue, and revenue bonds, which pay for revenue-generating projects like toll highways and sports arenas. The terms of these bonds are typically 25 to 30 years. Municipal bonds stand to gain high returns and are easy to access without penalty, but as with any type of investment, there’s always the potential for loss.
To choose the short-term investment that’s right for you, consider how much you want to invest, your timeframe, and the amount of risk you’re comfortable with. Conduct research and assess your individual situation to determine which short-term investments you’ll benefit from the most.
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This post was updated November 6, 2019. It was originally published November 6, 2019.