August 15, 2017

Short-Term Investments

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The best short-term investments provide good returns with low risk. Here are the top 10 investments for your short-term goals.

Investing money for the short-term often means inflated risk. One wrong turn and your money is gone. Then what happens?

To lessen your chances of heartache over lost money, your short-term investments should be limited to pretty safe options. So, steer clear of trendy stocks in the near term. But also look beyond savings accounts that provide pure safety but negligible interest. They're barely worth your time when your focus is on growing money.

What you need for the short term are investments with minimal risk and a decent return. We're talking about investments that you need for less than 5 years. Money for a dream vacation, wedding, or a down payment are short-term goals.

Keep reading for the top short-term investments for making your more immediate dreams a reality.

Top 10 Short-Term Investment Ideas

Debt Payoff

Investments and paying off debt sound like two different principles. Are they, though?

Debt costs you money. You may pay 10% or higher interest on credit card debt. $10,000 in credit card debt can cost you almost $1,000 in interest for a year. That's on the low end. It's not unheard of to see credit card interest rates over 20%. Don't forget, the interest keeps compounding until you pay it off. Before you know it, you've paid thousands of dollars in interest. What if you could have invested it elsewhere?

Tip: How does paying off debt help you invest? Consider it an instant return on your investment. Say you saved 10% interest by paying off your debt. That's a 10% return on your investment.

As you pay your debt down, keep these things in mind:

  • The more you pay off each month, the less interest you pay. As you pay your balance down, you'll save on future interest charges. Eventually you'll see a full return on your investment. You then have money you can use on other investments (see below).

  • Transferring to a 0% APR credit card can help you move the debt faster. You won't pay interest as long as you pay the debt off during the introductory period. All money you pay towards the debt pays down the principal.

  • It's best if you focus on one credit card at a time. Choose the card with the highest interest rate and pay it down. Pay the minimum payment on the rest of your cards. When you pay the first balance off, choose the next highest and so on. This helps minimize the interest you pay. It also furthers the return on your investment.

Online Savings Account

Everyone needs an emergency fund. Credit cards are nice in a pinch. But not if it means putting yourself in debt again.

Sure, you could open a savings account at your local bank. Do you want to make less than 1% interest?

Instead, look for high interest online savings and money market accounts. Some online-centric banks offer interest rates competitive with your local bank's CD rates. You get the interest without the time restraints.

Keep these things in mind when looking for an online savings account:

  • Make sure automatic deposits are free. Many banks offer this service but require a minimum deposit. Read the fine print before making savings automatic. It's a nice benefit if you can do it, but you shouldn't pay for it.

  • Make sure there are no miscellaneous fees. Minimum deposit requirements, inactivity fees, and monthly service fees are a few examples. Many banks don't charge anything; look for those options when you can.

  • Big banks often provide the lowest interest rates. Opening an online account gives you access to hundreds of online banks. Shop for the best interest rate combined with the best terms.

CDs

CDs are still a viable option. Their interest rates are slightly higher than online savings or money market accounts. The downside is you can't touch the money before maturity. If you do, you'll pay a penalty. This isn't always a bad thing, though. You tie the money up and forget about it.

Consider the following when choosing the right CD for your investments:

  • Long-term CDs aren't the only way to make a decent return. You can play the market and invest in only short-term CDs. This way you get the latest interest rate with each new investment. Of course, this only works during a time when interest rates are on the rise. The longer you invest your money, the higher the interest rate.

  • Pay close attention to the offered rates. It's not unusual to find one bank offering 0.02% APY and another offering 0.72% for the same minimum deposit. Also, watch the minimum deposit requirements. Many advertised interest rates require a minimum investment. You may make much less without realizing it.

  • Know the early withdrawal penalties. Life happens. If you need your funds now, you should know what it would cost. Some banks charge 3 months of interest. Others may charge as much as a full year of interest, though. It depends on the term of the CD and the bank's requirements.

Online Checking Account

Again, you probably don't think of checking accounts when you think of investments. Your local branch probably offers a laughable interest rate.

Many online checking accounts offer slightly higher interest rates, though.

Tip: Online banks may also offer a sign-on bonus. You deposit a specific amount and get a bonus. The money may have to sit there for a few months. But, you may earn several hundred dollars just for opening the account.

Before you sign on, keep these things in mind:

  • Find out the requirements for the deposit. A specific opening balance, minimum monthly balance, or automatic deposits are common. Make sure you can meet the requirements in the timeframe to get the bonus.

  • Know how long the money must sit in the account. Some banks charge a penalty for early withdrawals or account closures.

  • Read the fine print regarding the bank's fees. Minimum monthly balances, monthly service fees, and teller fees are just a few examples. Don't let the fees eat away at the return on your investment.

Roth IRA

Roth IRAs are generally for long-term investments: think retirement. But, there's a catch. You can use yours if you are in a pinch. We don't recommend using a Roth IRA for the short-term. But it's there if you need it.

Roth IRA funds are after-tax dollars. Since you already paid the taxes, there's no early withdrawal penalty. You get the best of both worlds. You invest for the future and have current liquidity if you need it.

Consider these factors when looking for the right Roth IRA account:

  • Don't count your earnings as a part of your "emergency fund." If you withdraw funds, you may only take your contributions. For example, you invested $4,000, but it grew to $4,500. You may only early withdraw $4,000 without penalty or tax implications.

  • Wait until you max out your employer-matched 401(k) contributions. Your 401(k) is a long-term investment, but matched contributions is money your employer provides. This is before any earnings. Don't cut your retirement funds short.

  • Pay close attention to account fees. Many offer no-fee accounts. This includes no transaction or commission fees. Do your research online to find reputable companies offering these benefits. This helps you maximize the return on your investment.

Cash Back Credit Cards

Many credit cards offer incentives, including cash back. You may consider it a short-term investment. Most credit card companies give you a statement credit. It's like cash, just not directly in your wallet. You pay less out of pocket when paying your credit card bill, though.

Tip: The credit card promotions change frequently. Research the latest offers available and choose the one that fits your needs.

Some cards offer sign-up bonuses. Others offer points if you spend a certain amount of money within the first 3 months. Don't go on a spending spree, though.

Here's a trick:

Charge your normal monthly expenses. Utilities, cell phones, groceries, and insurance are a few examples. You pay these items anyways. When the credit card bill comes, pay it in full. You get the cash back credit for meeting the specified requirements.

Before you sign up for a cash back credit card, keep these things in mind:

  • If you don't pay the full balance off, you'll pay interest charges. This can deplete the return on your investment.

  • Watch out for annual fees. Many credit cards with sign-up bonuses have a sizeable annual fee.

  • You may have other options aside from cash back. Calculate the return on your investment for each option. A few examples include airline travel and gift cards.

Peer-to-Peer Lending

Commissions eat away at investment returns. Peer-to-peer lending removes the middleman. This helps you save on commissions. You invest directly in those who need it. Companies like Lending Club and Prosper offer this type of investment. They offer returns as high as 10% along with the help to make the loan happen.

Here are a few things you should consider before investing as a peer:

  • Choose your risk level wisely. Lending Club, for example, grades borrowers from A to G. Higher grade (A loans) have lower interest rates and lower risk. Lower grade (G loans) have higher interest rates but higher risk.

  • Consider diversifying your risk by investing in hundreds of loans at once. Many peer-to-peer lenders require a minimum $25 investment. Even with $1,000, you can invest in as many as 40 loans. If a few default, hopefully the others make up for the loss.

  • Companies like Lending Club offer a portfolio of loans. Rather than manually choosing one loan, you fund a piece of many loans. You can choose an automatic mix or customize your own portfolio. This helps you stay in control of your risk level and return on investment.

Stocks

Investing in stocks is an aggressive approach. Many investors use stocks as a long-term approach. They view it as all or nothing. If they stick out the losses, they often recoup the principal.

You can invest in stocks for the short-term, though. You must do your research. The right information and diversification can lead to successful investments in stocks.

Here are some things to consider before investing in stocks:

  • Find stable companies with a history of rising stock prices. Investing in the hottest, new public stock might not be the right choice. Instead, focus on larger companies like Apple or Facebook. They have a proven history of rising stock prices.

  • Use online platforms, like E*TRADE, to minimize your brokerage fees. You'll also get online assistance. E*TRADE offers many tools and resources that help beginning investors. Hefty fees only eat away at your earnings.

  • Gauge your risk tolerance before investing. If the amount you invest will make you late on your bills, don't do it.

Short-Term Bonds

Bonds are company or government loans. You provide the principal and they pay the interest. Long-term bonds carry an inflation risk. As rates go up, bond values go down. Short-term bonds don't suffer as much. Purchase short-term bond funds or exchange-traded funds (ETFs). The bonds usually mature in less than 2 years. It's unlikely rates will change that significantly within 2 years, so you've got some protection around your initial investment.

Here are some things you should consider before investing in short-term bonds:

  • You can choose between mutual fund bonds and ETFs. Pay close attention to commissions and other service-related fees. Mutual fund bonds may provide check writing privileges. We don't recommend this as it eats away at your profits.

  • Each type of short-term bond has different tax implications. Corporate bonds pay high interest rates, but the full amount is taxable. Municipal bonds pay slightly lower interest rates. But you don't pay federal income taxes on your earnings (and, depending on the state, you may not pay state taxes either).

  • Make sure you diversify your portfolio. Even though short-term bonds have a low inflation risk, there's still some risk. Try investing in various industries and issuers to diversify your risk.

Treasury Bills

If safety is your number one priority, consider treasury bills. T-bills are one of the safest investments available.

You buy the bond for a discount. Let's say the face value is $100, but you pay $90. You'd make up the difference in interest at maturity. T-bills have maturity dates from a week to a year. $100 is the minimum investment. Granted, the interest you make is less than what you'd get on a CD. But it's almost guaranteed interest.

Here are some things you should consider with T-bills:

  • Treasury bill interest is exempt from state and local taxes. This helps further the return on your investment. However, you will owe federal income tax on your earnings.

  • The Treasury auctions treasury bills off weekly. 13- and 26-week T-bills auction on Mondays. 4-week bills auction on Tuesdays. 52-week bills auction once a month. You find out the discount at the time of the auction.

  • You can reinvest your T-bill proceeds. This helps to continually grow your interest earnings. You can set it up automatically when you purchase the security.

Note: Short-term investments can be profitable. As with any investment, though, there is risk. Weigh the pros and cons for your situation and do your research. No two investment strategies are the same. The earlier you invest is usually for the better. But it's never too late!

Disclaimer: Opinions expressed here are those of the author's alone. Please support CreditDonkey on our mission to help you make savvy financial decisions. Our free online service is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content.

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