Where To Invest If You Need Your Money in a Year
Whether you’re saving up for a down payment on a home or a dream vacation abroad next year, you’ll need someplace safe to keep that money until you need it. And if that money can earn a return, even better.
“Unfortunately, there aren’t many good options in the current environment for a one-year investment,” said Matthew Jenkins, a CFA and CFP.
On one hand, the stock market is too volatile for short-term savings. Though the S&P 500 has returned an average of 10% annually over the past 100 or so years, there’s too great of a chance that the market could be down for the year you have your money in it. (So far, 2022 has proven to be particularly tumultuous.) Plus, even if you did earn a positive return, you’d need to pay capital gains taxes on the profit when you sold.
Unfortunately, keeping your money in the bank won’t help it grow much. Interest rates are also extremely low at the moment. The Federal Reserve has kept its target rate at near-zero in the wake of the pandemic in order to stimulate economic growth. That said, it is expected to raise rates in 2022, which could help boost earnings on deposit accounts.
Where To Safely Save Your Money
“When investing for the short-term, you need to focus on protecting what you already have,” Jenkins said. That means putting your money in an account that won’t lose any principal. The interest earnings will likely be minimal, but there are some options that can help you eke out a higher return.
High-Yield Savings Account
For many, the best choice for money that’s needed in a year could be a high-yield savings account, Jenkins said. These work the same as traditional savings accounts, but the interest rates are about 10 to 20 times the national average. The best rates are often found at online banks, which have fewer overhead costs and pass those savings on to customers.
For example, the average savings account rate is just 0.06% right now, while some of the highest-yielding savings accounts are currently offering 0.60%. “The rates aren’t great, but they are better than zero,” Jenkins said. “They also offer solid protection in the form of FDIC insurance.”
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Certificate of Deposit (CD)
Another good option for saving money is a CD. These accounts require you to keep your money on deposit for a specific length of time (often from six months to five years). Usually, the longer you keep your money deposited, the higher the rate you’ll earn. However, if you withdraw your money early, you will likely have to pay an early withdrawal fee that can easily wipe out any interest earnings. If you choose a CD with a term of one year, you may be able to earn as much as 1.00% or more.
Jenkins said that U.S. Series I savings bonds can make sense if you are willing to own them for at least one year. These bonds are designed to help savings keep pace with inflation, which is currently at record levels. Currently, Series I bonds return over 7%, but you’ll earn less if you need to sell them within five years, Jenkins noted. Even so, he said they’re still a great deal for a short-term investment. “I bonds also offer solid protection from the U.S. government as well as some tax advantages.”
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