This guide to short-term investments will cover the following:
- What Is a Short-Term Investment?
- Certificates of Deposit
- Treasury Securities
- Savings and Checking Accounts
- Bond Funds
- Peer-to-Peer Lending
- Money Market Accounts
- Paying Off High-Interest Debt
- Roth IRA
- Cash-Back Reward Offers
- How To Manage Your Short-Term Investments
- Long-Term vs. Short-Term Investments
A short-term investment is an investment that is easily converted to cash and that is intended to be held for no longer than a few years. There’s no single definition as to what constitutes a short-term investment, but generally speaking, a short-term investment is one that you don’t intend to hold for more than about one year, and sometimes even a matter of months.
Nearly any investment can turn into a “short-term” investment if you sell it in a short period of time. For example, stocks are generally considered to be long-term investments, and there are even tax benefits that come into play if you hold stocks for longer than one year. But if you’re a day trader, looking to maximize the short-term movements in the stock market, then you’ll never hold a stock for a year. To a day trader, a stock is a short-term investment. However, to the average investor, a stock is a long-term investment.
So then, what investments are generally considered to be short-term? Think of it this way: A short-term investment is one that you can rapidly turn into cash without incurring too much risk or financial penalty.
Related: What Are Liquid Assets?
The 10 Best Short-Term Investments for 2019
No single investment is a cure-all for every investor. With different investment objectives and risk tolerances, every investor’s portfolio is unique. What follows is a list of short-term investments that you can pick and choose from to meet your particular needs. The formula of what you want from an investment, what need it will fulfill, and how much risk you’re willing to take to reach that goal will direct you toward the best way to invest money short-term.
Certificates of deposit, or CDs, have traditionally been the way for bank customers to earn more interest than in a simple checking or savings account. CDs can extend as long as 10 years or more, but most are generally short-term in nature, running from three months to one or two years. CDs are good investments for investors who value security, as they are insured.
The best rates for CDs can usually be found either with online banks or via promotional rates that frequently pop up at individual banks or credit unions. You can get your money out of a CD immediately at any time — if you’re willing to pay a penalty; otherwise, you’ll have to wait until the CD matures. However, many CDs mature in less than one year, so the wait isn’t usually that long.
- Insurance of up to $250,000 from the Federal Deposit Insurance Corp.
- Wide range of maturities typically available
- Generally higher interest rates than with savings or checking accounts
- Must be held until maturity to avoid early withdrawal penalties, which sometimes equal the total interest earned
- Interest possibly not as high as with some other investments, such as bonds
Learn More: Your Complete Certificate of Deposit (CD) Guide
For investors looking for safe investments, Treasury securities are at the top of the list. Backed by the full faith and credit of the U.S. government, Treasuries are considered the gold standard when it comes to safety. The U.S. government has never defaulted on its obligations to pay off Treasuries, so you can rest assured that you’ll get your interest and principal out of your investments.
Not all Treasury securities are short-term investments; in fact, most can be considered intermediate- or long-term. However, Treasury bills, which mature in ranges between a few days and 52 weeks, are the very definition of short-term investments.
You can buy Treasury bills direct from the U.S. government when they are auctioned regularly, or you can buy them through a broker. Minimum purchases are just $100. Treasuries are among the most liquid securities in the world, as more than 20 broker-dealers are required to stand ready to buy them back from investors at any time.
- Safe, as they are fully backed by the U.S. government
- Free from state and local income tax
- Federally taxable
- Low interest rates
If liquidity is your goal, a savings or checking account might be the best option for your short-term needs. Most investors are familiar with these common bank products, which are often the entry point into the investment world. Checking accounts aren’t generally great investments, as their primary purpose is to provide a means of transferring funds and making payments. Savings accounts, however, typically pay much higher yields than checking accounts.
Online banks in particular, with their lower-cost structure, often have the ability to pay significantly higher interest rates than those offered at traditional banks. As of April 2019, many online banks advertise interest rates of 2.4% or more, much higher than the national average rate of 0.09%. With the exception of the federal limitation of six withdrawals per month for certain types of transactions, you can take money out of your checking or savings accounts at any time.
Related: 10 Best Checking Accounts of 2019
- With online banks and/or promotional rates, interest is much higher than average
- Often come with convenient features like mobile apps, automated deposits and funds transfer capability
- FDIC insured, typically up to $250,000
- Can earn higher rates in other types of investments
- Certain withdrawals limited to six per month
Bond funds are a way to generate income without having to purchase individual bonds. They’re a good option for investors who don’t want to do the legwork of analyzing the qualities or characteristics of specific bonds. In a bond fund, shareholder contributions are invested by professional money managers, who can diversify risk and purchase bonds that may be difficult for the individual investor to find. Because bond funds have no maturity date, there’s no need to tie up money waiting for the return of principal, although there’s some risk to that, as well. This type of liquidity means that you can get your money out of a bond fund at any time, but due to movements in interest rates, you might have to sell at a loss.
- Can provide consistent monthly income
- Can be sold at any time
- Can reinvest and compound dividends
- Generally can expect dividends to slowly rise over time in conjunction with rising rates
- Easy to diversify, lowering the risk to the buyer
- Falling share prices when market interest rates rise
- Fund expenses, which can eat into distribution rates and overall return
- Possible fee or commission to buy
- Doesn’t mature, so no guarantee of stability or return of principal
Peer-to-peer lending puts you in the role of a bank. You extend microloans to individuals that you select, and they pay you interest until the principal comes due. Just like with a bank, if you offer a microloan, you’re taking the risk that you won’t get paid back. However, this risk can be minimized in a few ways. For starters, the best peer-to-peer lending sites let you screen the recipients of your loan, and you can choose the ones you feel most comfortable with. Next, as the name implies, a microloan is usually a small investment, so in the worst-case scenario, you won’t lose too much money.
Peer-to-peer loans are not nearly as liquid as some of the other investments on this list; if your borrower doesn’t have the money to pay you back, there’s not much you can do to pull out of your investment. They’re generally better suited for investors with a higher risk appetite or the desire to directly invest funds in particular causes or people.
- Investor can take the role of a bank and get paid interest on their money, typically at rates above savings rates
- Investor can choose a good cause for their money
- Risk losing entire investment
- Might not be able to get out of loan until it matures
Learn More: Pros and Cons of Peer-to-Peer Lending
Money market accounts combine features of both checking and savings accounts into an easy-to-access investment. A money market account will typically pay a higher interest rate than a checking account, but it will also usually offer check writing and other cash-access features.
Just like other deposit accounts, most money market accounts benefit from FDIC insurance of up to $250,000. Some banks offer promotional or high-yield money market accounts that provide much higher yields than the national average rate of 0.18%.
Money market accounts are just as liquid as regular checking and savings accounts, although they often come with higher minimum balance requirements, as well. They’re best for savers with higher cash balances who won’t need to withdraw their funds as often.
- Easier access to capital than with a savings account
- Higher yields than most checking accounts
- FDIC insured up to $250,000
- Withdrawals may be limited to six per month
- Might not offer ATM or debit card access
- Yields possibly not as high as other investments, such as bonds
Paying off high-interest debt might not feel like an “investment,” but it might be one of the best short-term investments you could possibly make.
The average interest rate on a credit card as of February 2019 was 15.09%. Many credit cards charge 25% or more. This means that every dollar you leave unpaid on your credit cards could be effectively “losing” 15-25% or more per year. In other words, every dollar of credit card debt that you pay off essentially earns that 15-25% return. You’re not likely to find that type of return from any traditional investment, from stocks and bonds to mutual funds or exchange-traded funds.
With the long-term U.S. stock market return averaging about 10% a year, you can effectively outperform the market with your investments in any year that you pay off high-interest credit card debt, all without taking on any market risk at all. In fact, billionaire Mark Cuban commented in a 2018 interview that the best investment you could make is to pay off your debt, as it gives you a safe, immediate return.
At first glance, a Roth IRA might not sound like a good short-term investment. After all, IRA stands for “individual retirement account,” and retirement is a long-term goal. However, Roth IRAs have interesting tax and contribution characteristics, and in certain situations, they may end up fulfilling a short-term investment need.
With a Roth IRA, you don’t get a tax deduction for the money you contribute, as you would with a traditional IRA. As a result, the money you put into your Roth IRA goes in after-tax. Ultimately, when you withdraw your funds in retirement, both your contributions and your earnings come out tax-free.
This means that you can enjoy the tax-free status of your growing funds until you retire, if you so desire. But if you have a short-term emergency need, you can withdraw your after-tax contributions at any time without having to pay taxes or any penalties whatsoever. This is true even if you are under age 59 1/2, which would trigger an early withdrawal penalty from a traditional IRA. So, even though a Roth IRA is intended as a “no-touch,” long-term investment, if you really need your money in a pinch, you can get back your contributions at any time. Ideally, however, a Roth IRA is intended for a long-term investor.
Consider: The Best Roth IRA Accounts
Cash-back reward offers can be lucrative, but they come with a caveat. To get these rewards, you’ll be required to undertake certain activities. For example, some credit cards will offer cash back if you spend a certain amount on the cards within a limited period of time, with the rewards posting shortly thereafter.
This can be easy money if you’re in a position to pay off those charges immediately. If not, you’ll incur potentially large interest charges. Thus, this type of “investment” is only advisable for those with financial discipline and the ability to pay off their credit card bills in full on a timely basis.
- Easy way to earn money on expenses you are likely incurring already
- Can help establish good credit, thereby qualifying you for lower interest rates in the future
- Can trigger high interest charges if not paid off in a timely manner
- May require annual fees
Exchange-traded funds, or ETFs, trade on a stock exchange like other stocks. This provides them with liquidity, allowing you to buy and sell them at any time that the stock market is open. In that sense, ETFs can be very short-term investments indeed, offering you the ability to get your money out any time you would like.
However, many ETFs are still meant to be long-term investments. For example, the most popular ETF is an investment that tracks the performance of the S&P 500 stock market index. Short-term traders can take profits at any time if they wish, but long-term investors can hold that ETF for the long haul.
You can also buy ETFs that hold short-term investments, such as short-maturity bonds. In that case, even if you hold the ETF long term, you are investing in short-term investments.
With such a diverse range of ETF investments available, nearly any investor can likely find an ETF to match their investment goals and risk tolerance.
- Liquidity; can get out of an ETF at any time
- Countless investment options, with an ETF for seemingly any type of investment
- Can have low trading costs if trading through a low-cost broker
- Can trade down in value based on fear in the market, rather than based on fundamentals
- May trigger high commissions if you buy and sell frequently or use a high-cost broker
Short-term investments need to be monitored frequently, as things can change rapidly. If you don’t keep tabs on where your money is or when it matures, your financial life can get jumbled.
If you’re planning on doing all of your investing on your own, consider using some of these options to help you:
- Mobile apps
- File folder
If you’re willing to share the burden, ways to help you manage your short-term investments include:
- Investment clubs
- Working with a broker
- Hiring a professional money manager
There is no cut-and-dried answer as to whether short-term investments are “better” than long-term investments. Properly managed, both types of investments can fulfill important needs. The important thing to remember is that for most investors, both types of investments are necessary.
Long-term investments are designed to fulfill needs that likely seem far away. Even in your 40s, for example, retirement is likely 20 years away, and indeed retirement is often cited as the most common long-term investment goal. However, your other long-term investment goals might include a college education for your children, or your own personal long-term care costs.
Short-term investments are for the here and now. You might use these types of investments for an emergency fund, for vacation planning, or for the purchase of a new home in the near future.
The bottom line is that your own personal needs will dictate whether short-term or long-term investments are “better.” Although Treasury bills might not pay a high interest rate, for example, you’ll sleep much better at night if you are using Treasury bills rather than aggressive growth stocks to fill your emergency fund. By the same token, you’re likely to enjoy a more fruitful retirement if you’ve got some stocks in your retirement account rather than short-term CDs.
Up Next: 7 Best Long-Term Investments
John Csiszar served as a registered investment advisor for 18 years and earned a Certified Financial Planner designation before becoming a writing and editing contractor for private clients.
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