Updated July 11, 2018

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.

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What is a Short Term Investment?

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Investing money for the short term means you may need the money quickly (in the "short term"). One wrong turn and the money you need is gone. Then what happens?

To lessen your chances of losing money, your short-term investments should be limited to pretty safe options. So, steer clear of trendy stocks and options.

But look beyond savings accounts that provide safety but negligible interest. While you won't lose money in an FDIC-insured bank account, you won't generate returns greater than inflation either.

What you need for the short term are investments with minimal risk and modest returns. Unlike a long-term goal of retirement, this means investments you intend to hold for less than 5 years. Examples of such short-term goals include a dream vacation, a wedding, or a down payment on a house.

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

What is short term and long term investment?
A short term investment is usually held for 5 years or shorter. The goal is to grow your money for short term needs (such as for a house down payment). It should be low-risk with small, but reliable, returns. A long term investment is held for decades (such as for retirement). So it can be riskier since there is time to ride out the ups and downs of the market.

Top 10 Short-Term Investment Ideas

What is an example of a short term investment?
A short term investment is usually an investment of 5 years or shorter. The returns should be able to be converted to cash. Examples of short term investments are high-yield savings accounts, CDs, credit card rewards, and short term bonds.

Debt Payoff

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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 before the end of the introductory period. You may pay a one-time transaction fee - often around 3% of the balance transfer - but all other money goes straight to paying down the debt.

  • 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.

Sample Returns: 7.00% to 20.00% and up, depending on the interest rate charged on your debt

What are the best short term investments for small amounts of money?
Even if you have only a little bit of money, you can still invest for the short term. The best options are high-yield savings accounts and money markets. You are guaranteed interest and you can easily withdraw if you need the cash.

Online Savings Account

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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 while still being able to access your funds when needed.

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 (worst) 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. Check out the Top 5 Online Savings Accounts.

Sample Returns: 1.30% to 1.55%

What is the best investment option for short term?
Short term investments should have little risk and almost guaranteed returns. Safest options are high-yield savings, money market, and CDs.

CDs

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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.

Sample Returns: 1.10% to 2.10%

Tip: You may also consider brokered CDs. Brokered CDs are bought from a brokerage firm. Brokered CDs are issued by banks and are FDIC insured. However, make sure you understand whether there are any additional fees charged by the brokerage.

Online Checking Account

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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. Earning $200 for depositing $2,000 into a new account is effectively a 10% return on your investment. It's only a one-time bonus, but it still represents a big return. Check out current bank promotions now.

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.

Sample Returns: 1.30% to 1.55%, plus any one-time bonuses

Roth IRA

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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 think of your Roth IRA as a part of your "emergency fund." If you withdraw funds before retirement, you may only take your contributions. For example, you invested $4,000, but it grew to $4,500. You may only withdraw $4,000 without penalty or tax implications.

  • Wait to open a Roth IRA until you max out your employer-matched 401(k) contributions. Your 401(k) is a long-term investment, but matched contributions are money your employer provides directly. 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.

Sample Returns: 4.00% to 10.00% depending on your investment strategy

Cash Back Credit Cards

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Many credit cards offer incentives for spending, including cash back. As long as you never carry a balance on your card, you can think of your cash back as a short-term investment. Most credit card companies give you a statement credit, which effectively lowers your bill a little and allows you to invest that money elsewhere.

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 buy these items anyway, so you might as well receive some rewards for paying your utility bills. When the credit card bill comes, pay it in full. You'll get the cash back credit, which you can use to help pay for your other regular expenses.

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. Most cash-back bonuses are 1-2%, whereas most interest rates are in excess of 10%. This means you will lose money overall if you don't pay off your balance in full every month.

  • 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.

Sample Returns: 1.00% to 3.00%

Peer-to-Peer Lending

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Commissions eat away at investment returns. Peer-to-peer lending can help you save on commissions, while you invest directly with people who need it. Companies like Lending Club and Prosper offer this type of investment. They offer returns as high as 10% and allow you to research the investments yourself.

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.

Sample Returns: 3.00% to 9.00%

Stocks

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Investing in stocks is an aggressive approach. Many investors use stocks as a long-term approach.

You can invest in stocks for the short-term, though. You must do your research. The right information and diversification can lead to successful short-term 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 with long histories like Visa or Wal-Mart. 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. Since this is a short-term investment, you might consider investing just a small amount in stocks.

Sample Returns: 3.00% to 20.00% and up (but this is a risky strategy, so don't get too excited!)

Is dollar cost averaging a short term investment strategy?
Dollar cost averaging is better for long term investments. This is when you spread out your stock purchases over set intervals, instead of buying in one huge lump-sum at once. This levels out the risk from market fluctuations over a period of time. Sometimes you'll be buying when stock prices fall. So you need to be in it for the long haul to wait for the market to rise.

Short-Term Bonds

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Bonds are loans issued by companies or by local, state, or even the federal government. You provide the principal and the company or government pays you interest in return. Long-term bonds carry inflation risk. As rates increase, bond values decrease. Short-term bonds don't suffer as much. Purchase short-term bond funds or exchange-traded funds (ETFs). These types of bonds usually mature in less than 2 years, which partially protects against inflation risk.

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

  • You can choose between bond mutual funds and ETFs. Pay close attention to commissions and other service-related fees.

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

Sample Returns: 1.00% to 5.50%

Tip: You might want to consider BulletShares. These are ETFs that invest in bonds that all mature around the same time.

If you invest in BulletShares, it's similar to investing in a basket of bonds that all have the same maturity date. This way, you can make this a short-term investment if you're picking a BulletShare with a 1- or 2-year maturity. However, you're not investing in the bonds directly, which means you're paying fees to the investment manager. And as with any investment other than an FDIC-insured account, you might lose money.

Are high yield investments good for the short term?
High yield investments are risky. High yield could also mean high losses. Examples of high yield investments are options trading, preferred stocks, and high yield bonds. These could give you a high return in a short period of time, but you have to accept the risk of losing money too.

Treasury Bills

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

How they work:
You buy the bond for a discount. Let's say the face value is $100, but you pay $90, a discount of $10. You'd make up the difference in interest and receive $100 at maturity. T-bills have maturity dates from a week to a year after purchase. $100 is the minimum investment. Risk is extremely low if not zero, but the interest you earn will typically be lower than what you'd make on a CD.

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 U.S. 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.

Sample Returns: 1.00% to 2.07%

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!

Bottom Line

Short term investments differ from your long term goals. Use your short term investments goals to accomplish something financially you would not be able to do otherwise. Something like a tuition payment (depending on the school of course) or down payment could be accomplished with a short term investment.

Remember the higher the risk the greater potential for reward, however, short term investments are best known for minimal risk and modest returns.

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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July
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2018

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