6 Best Ways To Invest Your Money If You’ll Need It in the Next 5 Years
Whether you’re saving for a car, a house, a wedding or a degree, time is always an investor’s biggest asset. If you want to invest for a big purchase that’s still five years out, congratulations on planning ahead — now, where and how do you invest?
The following is a list of investment ideas that could help your small pile of money grow up big and strong over the course of a half-decade.
Some are more aggressive investments for those willing to take on more risk for a potentially bigger payout. Others are safer and more conservative bets designed to guard your principal and deliver smaller gains. The list also includes a few alternative options that are farther out of the mainstream, but that are gaining traction among investors who want to branch out and spread their money around.
A Roth IRA is a type of account — it’s not an investment itself — but it earns top billing on this list because it’s such an excellent, underrated and versatile long-term savings vehicle. Unlike 401(k)s and traditional IRAs — which are only for retirement savings — Roth IRAs are funded with money that has already been taxed and can therefore be withdrawn at any time penalty-free.
As CNBC points out, this distinction makes a Roth IRA an excellent choice for saving toward a medium-term goal of five years or so. When you’re ready — be it in five years or 50 — you can withdraw what you need and leave whatever is left over to continue growing in a tax-sheltered account.
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Index Fund ETFs
If you’re new to investing, ETFs take the guesswork out of the stock market and let you spread your money out across dozens, hundreds or even thousands of stocks with the purchase of a single share. You can buy and sell them on the open market just like shares of Amazon or Coca-Cola and they don’t come with the expense or long-term commitments associated with mutual funds.
There’s a match for just about every investor. If you can imagine it, there’s probably an ETF that tracks it, although the most popular ETFs track the big, benchmark indexes like the S&P 500 and the Nasdaq. With a long-term goal of five years, index fund ETFs are as close to a set-it-and-forget-it investment that you’ll find on the stock market.
You’ll never get the kind of returns with bonds that you could get on the stock market, but while bonds aren’t completely risk-free, they’re a whole lot safer than stocks — particularly if you’re on a five-year timetable that doesn’t leave a lot of time to recover from a major stock market crash.
If you’re looking to defend your principal with a relatively safe investment that delivers modest returns to negate inflation, consider the different kinds of bonds:
- Municipal bonds: Muni bonds are issued by state and local governments and often come with short-term maturity periods like two years or five years. They’re generally exempt from taxes but they pay lower yields, which makes them a favorite among investors in higher tax brackets.
- Corporate bonds: Corporate bonds are taxed, but they make up for it with higher yields. That makes them better for lower-income investors whose tax rates are insubstantial enough for the higher yield to be worth the tradeoff.
- High-yield bonds: These bonds offer a greater payout, but they have lower credit ratings and therefore carry greater risk.
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Backed by the full faith and credit of the United States government, Treasuries are among the safest investments in the world. Treasury bonds generally come with 30-year maturity terms, which scratches them off this list. Treasury notes, too, have longer maturity periods of around 10 years. But bonds and notes are not the only Treasuries. Other options include:
- Treasury inflation-protected securities: TIPS, which offer five-year maturity options, are adjusted based on the Consumer Price Index. They pay interest every six months.
- Treasury bills: T-bills are short-term investments that mature in anywhere from just a few days to one year.
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Certificates of Deposit
Like bonds and Treasuries, CDs are known for safety and security — and it just so happens that they’re commonly offered in five-year terms. Essentially a long-term savings account, CDs require you to deposit a predetermined amount of money in a bank for a predetermined amount of time. When the CD matures, the bank will return your principal along with a modest interest payment.
Are you looking to step outside the mainstream and take on more risk in the pursuit of outsized gains? Consider these off-the-beaten-path alternatives.
- Peer-to-peer lending: When people or businesses need loans that are too small for banks to touch, or if they’re not good candidates for traditional financing, they head to sites like Kiva, Peerform and Prosper. There, “microlenders” like you analyze their risk and fund their loans on the promise of repayment plus interest.
- Crowdsourced real estate: Platforms like Fundrise, Yieldstreet and CrowdStreet offer an opportunity to invest in real estate without actually owning property. Just like P2P lending, micro-investors can pool their money to help finance real estate projects, and in exchange, they get a piece of the profits — but they also take on a piece of the risk.
- Cryptocurrency: Anyone who tells you that they know where cryptocurrency will be five years from now is simply not being honest. When it comes to Bitcoin, Dogecoin, Ethereum and the rest, the only real guarantee is volatility. But if you can stomach five years on a market roller-coaster, the last decade has proven that crypto fortunes are there for the making.
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Last updated: Oct. 12, 2021