For many, knowing where to invest their money can be nerve-wracking, especially if it’s in a long-term account that they can’t immediately access without facing fees or penalties. Fortunately, there are a variety of short-term investments that you can consider to grow your wealth and withdraw from in a shorter period of time.
Knowing what the best short-term investments are is hard, as it depends on current market conditions and your own financial goals. Today, short-term investments are even more challenging to understand as the COVID-19 pandemic is causing market conditions to fluctuate. However, there are a variety of short-term investments worth considering. Below, we’ll cover short-term investment examples throughout this post to give you a greater understanding of your options.
Read end-to-end to explore what short-term investments are available to you, or browse different short-term investments using the links below.
What Are Short-Term Investments?
You’ve probably heard the term thrown around here and there, but what are short-term investments? The short-term investment definition considers short-term investments, also referred to as temporary investments or marketable securities, as investments that can produce returns quickly, usually in 5 years or less.
People may place their money in short-term investment vehicles if they need their money to grow by a certain time. Unlike long-term investments like stocks and mutual funds that are riskier and can drop in price from bear markets, short-term investments are often safer, as the risk of losing gains is often lower.
There are a few reasons why someone may want to invest in short-term securities. For example, if you’re planning your wedding or hoping to place a down payment on a new home, you might consider short-term investments to grow your money and have access to it in a shorter period of time.
Another reason someone may become a short-term investor is because they want to take advantage of rising interest rates within a short period of time. While this strategy can be difficult, those knowledgeable on short-term investing can earn profits off of their marketable securities.
Common types of short-term investments include savings accounts, money market accounts, certificates of deposit (CDs), Treasuries, bond funds, peer-to-peer lending. In the next section, you’ll learn more about each of these types of short-term investments.
Types of Short-Term Investments
There are numerous short-term investments you can place your money in with hopes of gaining a return. Knowing how to start investing can be confusing, especially if it’s your first time and you know little about different types of investment vehicles. Below, we’ll cover some of the best short-term investments you may want to consider in 2020.
1. Savings Accounts
When you get paid, you most likely place your earnings in a bank account. There are two main types of bank accounts: checking and savings. Checking accounts are great for everyday spending, as you can withdraw funds for bills, groceries, and other transactions whenever you please. This is because checking accounts usually earn little to no interest.
Savings accounts, on the other hand, can earn interest. There are plenty of savings accounts where you can store your money, and one option is a high-yield savings account. High-yield savings accounts often offer high interest rates, which can earn you money over time. However, they usually place limits on how many withdrawals you can make each month – usually six. Savings accounts are FDIC-insured up to $250,000, which will protect your money in the event of a market collapse.
If you have robust savings or an emergency fund sitting around in a checking account earning no interest that you don’t plan on withdrawing from in the near future, you may want to consider placing your money in a savings account. Doing so can earn you more money in interest each month.
2. Money Market Accounts
A money market account is a high-interest earning account that typically pays a higher rate than a traditional savings account. However, these accounts often require a minimum investment, which means you may have to put down a sizable chunk of your savings to open one of these accounts. Money market accounts, similar to checking accounts, saving accounts, and CDs are FDIC-insured up to $250,000.
It’s important not to confuse money market accounts with their riskier counterpart, money market mutual funds. Money market mutual funds, which are not FDIC-insured, invest in debts and short-term maturities of less than one year.
Certificates of deposit (CDs) are a savings instrument that lock your funds for a fixed period of time. While locked, the bank or financial institution that offers your CD will pay a fixed-rate interest for the duration of the CD. Typically, the longer your CD term, the higher the interest rate you’ll receive. CDs typically offer higher interest rates compared to savings accounts and money market accounts. You can choose terms that can range from 7 days up to ten years. However, the most common CD terms are six months, one year, or five years.
When you open a CD, you typically agree to keep your money held in the account for the specified amount of time. If you withdraw money from your CD before it matures, you can face an early withdrawal fee or have to forfeit a portion of the interest you earned. Another drawback is if you tie your money up in a CD, you can risk missing out on another opportunity that offers a higher rate.
The U.S. Treasury offers a variety of securities you can invest in and grow your money. Some of the most common treasuries include:
- Treasury Notes (T-Notes): Issued with maturities of 2, 3, 5, 7, and 10 years and pay interest every six months
- Treasury Bills (T-Bills): Short-term securities that are sold as a discount from their face value and have maturities that range from a few days to 52 weeks
- Treasury Bonds (T-Bonds): Long-term investments that pay interest every six months and mature in 20 or 30 years
- Floating-Rate Notes (FRNs): Issued for a term of 2 years with interest being paid quarterly, with interest payments rising and falling based on discount rates for 13-week Treasury bills
- Treasury Inflation-Protected Securities (TIPS): Marketable securities with maturities of 5, 10, ad 30 years with interest being paid every six months with the principal adjusting by changes in the Consumer Price Index
Besides Treasury Bonds, these Treasuries are all backed by the U.S. government and are short-term investments worth considering.
5. Bond Funds
Bond funds invest in a pool of bonds, such as corporate, municipal, and government savings bonds. Ultra-short bond funds are similar to mutual funds. However, instead of investing in a pool of stocks, they’re investing in a pool of bonds with short durations.
In short, a bond is a loan to a government or business that pays back a fixed rate of return. They are generally safer than stocks, but still pose risks, such as a borrower defaulting.
When it comes to bond funds, you might want to consider investing in ones that primarily own government bonds. This is because government bonds are usually less risky than corporate bonds and have a lower chance of defaulting because they’re backed by the government. Bond funds are a viable option if you’re looking for a short-term high-yield investment. Additionally, you most likely won’t face a penalty if you withdraw early.
6. Peer-to-Peer Lending
Peer-to-peer lending, or P2P lending, is an avenue for small businesses and individuals to access capital through the internet. P2P lending is similar to taking a loan out from a bank, but comes from a peer instead, such as your neighbor, family member, or friend.
To get started in peer-to-peer lending, you first need to join a lending platform and decide what types of loans you’ll offer and the risk you’re willing to accept. From there, you’ll be able to pick and choose borrowers based on their creditworthiness and begin making money through interest.
With P2P lending, you can often yield greater results compared to savings or CDs. However, a drawback is that P2P lending isn’t FDIC-insured, which means it can be a risky investment if the borrower defaults and can’t pay back your loan.
7. Roth IRAs
Saving for retirement is a common goal for many individuals. One way to save for retirement is with an individual retirement account, such as a Roth IRA. While the initial purpose of a Roth IRA is to save for retirement, it can be used as a short-term investment. Unlike a traditional IRA, Roth IRAs allow you to make withdrawals without facing a penalty or having to pay taxes on your contributions. Any gains, however, can face taxes and penalties if you withdraw early.
Investment Options for Short-Term Money
There are numerous investment options for short-term money at your disposal. You don’t want to fall victim to common investment mistakes like buying a security without doing your research. Refer to the chart below to view a side-by-side comparison of common short-term investments.
Key Takeaways on Short-Term Investments
If you’re looking to grow your money in a short amount of time, short-term investments might be the option for you. Here are some key takeaways on short-term investments:
- Short-term investments are investments that can produce returns quickly, typically in five years or less.
- There are numerous short-term investment examples, such as savings accounts, money market accounts, CDs, Treasuries, bond funds, peer-to-peer lending, and Roth IRAs.
- The best short-term investments are those that match your financial goals. It’s important to do your research to find a short-term investment that works for you.