Investing is arguably one of the best ways to build wealth. You can stash your hard-earned money either for the short-term or long-term based on your investing goals. Typically, many people tend to invest for the long term to avoid the noise of volatile markets and maximize their potential returns.
While long-term investments are great, you also want to have something you can tap into when you need quick cash. That’s where short-term investments come in. Here’s a quick overview of short-term investments and a few good options you may want to add to your portfolio.
What Is a Short-Term Investment?
Short-term investments refer to assets that you can easily or quickly convert to cash, typically in less than five years, with many of them being sold within a year. If you have a project that you intend to convert to cash in a year or so, you already have a short-term investment.
It’s vital to keep in mind that every investor has their own investment goals and risk tolerance. What works for another investor may not work for you.
10 Best Short-Term Investments To Consider
Here are the ten best short-term investments to consider for 2022. You can pick what works for your investing needs.
1. High-Yield Savings Accounts
Instead of holding cash in your checking account, you can invest in a high-yield savings account. Typically, banks and credit unions offer high-yield savings accounts. Unlike the traditional savings account, this type of account offersinterest rates that are, on average, much higher than the national average savings account rate.
- Your savings are insured by the Federal Deposit Insurance Corporation and National Credit Union Administration for banks and credit unions, respectively. You can find comfort knowing that your money will remain safe even if the bank or credit union fails.
- Offers easy access to cash. With a high-yield savings account, you can get up to six free transfer or withdrawal requests per cycle, although this varies depending on the financial institution.
- Inflation can catch up with you if you hold your investment for too long.
- Some banks charge expensive ATM and account maintenance fees.
2. Short-Term Corporate Bond Funds
Major corporations issue corporate bonds to raise investment money and in return pay interest on the principal. Corporate bonds pay interest at specified intervals, often quarterly or biannually.
- Safe investment, as they are held to legal commitments to pay back the bond, and especially if you invest in a broadly diversified collection of funds
- Highly liquid, you can sell and buy any time on the financial markets
- Not insured
3. Money Market Accounts
A money market account is a kind of savings account with a checking feature. Like any other savings account, it has the maximum number of withdrawals, typically six per month. The best feature of money market accounts is that they pay more interest than ordinary savings accounts.
When considering this option, look for an account insured by the FDIC to protect yourself from losing money.
- Offers competitive rates to allow your interest to accrue more
- You can easily access cash whenever you need
- Some banks or credit unions require a minimum balance
- Occasional federal restrictions on withdrawals
4. Certificates of Deposit
If you are looking for a short-term investment that allows you to earn high interest, a certificate of deposit might be a perfect choice. With CDs, you can hold your investment for the short-term, maturing in just a few days or months, or one year. However, you can extend your investment to 10 years or longer if you’d like, for example, by creating a CD ladder or opening an account with longer term lengths, if they are available.
- High liquidity, meaning you are free to withdraw the money at any time
- FDIC-insured, so your investment is safe
- Wide range of maturities available
- Penalty is charged for withdrawals before maturity
5. Cash Management Accounts
A cash management account lets you make short-term investments with your money by investing, writing checks and transferring money. Online stockbrokers and robo-advisors offer cash management accounts. If you are looking for flexibility in your short-term investments, this might be an ideal option for you.
- Easy access to cash
- High annual percentage yield
- Less risky as most accounts are invested in low-yield money market funds
- Lower rates than high-yield savings accounts
6. Short-Term U.S. Government Bond Funds
The U.S. federal government and authorized agencies offer government bond funds from time to time. The investment opportunities often come in the form of T-bonds, T-notes, T-bills and mortgage-backed securities. Buying government bonds is one of the best short-term investments.
- Low risk investment
- Government bonds are widely traded, and you can buy and sell any day
- Interest rate risk
7. No-Penalty Certificates of Deposit
A no-penalty certificate of deposit allows you to avoid paying typical bank fees if you opt out before the CD matures. In general, CDs offer more returns than money market accounts and savings accounts.
The short-term investment means you agree to keep the money in your account for some time, which can be weeks or years. In return, the bank offers a higher interest rate either regularly or at the end of the CD’s term, in which case you get the money you invested and the accrued interest.
- FDIC-insured up to $250,000 per account
- You are free to withdraw your investment without paying a fee if you want to deposit it elsewhere
- Lower rates than regular CDs
8. Money Market Mutual Funds
While money market mutual funds sound similar to money market accounts, they’re very different. A money market mutual fund allows you to invest in a pool of securities such as municipal securities or corporate debt securities. These types of investments generally generate more returns than other interest-bearing accounts.
- You can access your money when you need it
- Relatively good return on investment
- Not federally-insured; hence you might lose your money in severe market distress
9. Online Savings Account
If you are looking for a highly liquid short-term investment option, an online savings account is the way to go. This type of account often has higher interest rates than traditional savings accounts. Plus, there’s no penalty for withdrawal, just a limit on the number of monthly transactions.
- Easy access to your money
- No penalty for early withdrawal
- Higher interest rates than brick-and-mortar banks
- Limited withdrawals
10. Peer-to-Peer Lending
Peer-to-peer lending is an alternative kind of personal loan. If you become a P2P lender, you’re essentially acting like a bank by helping people who wouldn’t otherwise qualify for a loan to borrow money. P2P lenders select individuals and extend microloans to them, who will later repay the loans with interest.
- Better rates, typically above average savings rate
- You can choose who to approve for a loan
- There is a risk of losing the investment
- Not as liquid as other options because you depend on your borrowers to pay back.
Your investing needs and goals will always have a significant impact on the investment path you choose. While some investments have higher rates of investment, they may be too risky. You need to strike a balance and go with something that works for you. The right way to make a sound investment decision is to research widely and consult investment experts before channeling your money into any venture.
John Csiszar contributed to the reporting for this article.