If you want to invest your money into something but you also want to have access to your funds in under 5 years, you might want to consider some of the best short term investments that we have put together for you below.
Usually, when someone plans to invest, they think long-term in mind, because they will have the ability to potentially earn more money with lesser risk.
However, there are some short-term investment methods that are also low risk, as you’ll soon find out.
Why Consider a Short-Term Investment?
A long-term investment method is preferred by many investors for example Warren Buffet, who believes that any stock will eventually rebound even if there are short-term fluctuations in the market that might lower its value.
One of the main reasons for someone to choose a short-term investment vs a long-term one is the ability to access their funds quicker.
If you know that you want to buy a car for example in 2 years, then it makes no sense to invest your money into a longer-term investment that will bring you good returns after waiting 5 years or more.
But fortunately, there are still some good short-term investments that you can do and have your money grow a little bit, which is better than having them sit in a checking account.
Another good reason to choose short-term investment over longer-term is to have more security over your funds because unlike stocks that are more volatile, these are less riskier and some of them even have your funds insured by the FDIC or the government.
What to do before investing?
Before you even think about starting to invest, you should create an emergency fund and rainy day fund first. This will make sure that in case something happens like a sudden job loss or a big unexpected bill, you and your family are secure.
You should also consider settling some of your debts if you have any. This will make a bigger impact on your financial goals than short-term investments.
Other things to consider are:
- Is it easy to liquidate the investments made and get cash fast?
- Do you need to access that money on a regular basis?
- What returns are you expecting?
- For how much time do you want to invest your money? (a few days, a month, a year, five years)
What are some of the Best Short-Term Investments?
1. High-Yield Savings Accounts
Sure, you won’t earn a fortune by putting your money into a high-yield savings account, but it’s still a much safer option to invest your money than other methods out there.
Especially since every bank is covered by the FDIC insurance which means that you have your funds covered up to $250,000 even if the bank goes under (which is very rare to happen in the first place).
The annual percentage yield (APY) will depend on the bank, the national average is 0.05% but some online savings accounts can go much higher than that, up to 2.5%.
High-yield savings accounts are one of the best short term investments because you also have easy access to your money (up to 6 monthly withdrawals, anything more and you will receive extra fees and penalties).
Also compared to some other methods on this list, putting your money into a savings account allows you to sleep better at night, knowing that your funds are safe and insured.
2. Certificates of Deposit (CDs)
Certificates of deposit, also known as CDs are another type of savings accounts where you can put your funds in for a fixed period of time. The time span ranges from 3 months to 5 years.
However unlike other savings accounts, with CDs, you can’t access your money as freely without incurring stiff withdrawal penalties.
So it’s best to let your money sit in your CD account for as long as possible in order to earn more interest.
CD interest rates and returns vary depending on the bank that you choose, but usually, they are in the 0.5-3% range.
3. Money Market Accounts (MMAs)
Money Market accounts are another type of savings account, but with higher interest rates.
However, in order to get those high-interest rates (they are usually 1-2%), banks will require a minimum deposit and they will also have withdrawal limits in place.
You might also be required to keep a minimum balance in order to not incur any fees. So as you can see money market accounts are a great short-term investment method as long as you are willing to lose some flexibility when it comes to accessing your funds.
Compared to CDs though, money market accounts can be accessed a few times without getting huge penalties, and they also have about the same interest rates, so they are not a bad option at all.
4. Corporate bonds
These short-term bonds are issued by corporations that are looking for more money in order to fund or expand their business even more.
It’s worth noting that because these bonds are not insured by the FDIC, they carry a higher risk than other short term investment methods on this list.
However you also have the potential of getting a higher return rate, so the risk may be worth it, especially if you’re going after the blue-chip corporations, that have been around since forever, and are much more stable than startups.
5. Municipal Bonds
These are bonds that are issued by local government, that help fund their infrastructure and other projects around your area, for example, a new park or repairing a road.
They are similar to corporate bonds, but they have less risk involved since they are backed by the government. Another great thing about this short-term investment option is that they usually not taxable. So if you’re looking to pay less tax on your income, this is a great way to do it.
Plus they payout twice a year, and the average annual returns are somewhere between 2% and 5%.
You will also be able to take out money whenever you need it, without having the risk of incurring high fees and penalties.
6. Treasury Bills
Treasury bills are bonds that you buy from the U.S. Treasury and their maturity period ranges from a couple of days to a year. They also work similar to CDs, so that means that the longer you let your funds mature without touching them, you will get a higher interest.
You can buy T-bills at a discounted rate from their face value, so for example you can buy a $1000 bill for $970, but when the T-bill matures the treasury will pay you $1,000, which brings you $30 in profit.
Sure they are not the best short term investment to make lots of money back in return interest, but they can sometimes be better than CDs or other savings accounts.
Also, these treasury bills are backed by the U.S. government, which in turn makes them some of the safest short-term investments out there.
7. Peer-to-peer lending
Peer-to-peer (P2P) lending is another great way to invest your money short term. The concept is only been around for a couple of years now, but it’s predicted to grow over the next years.
P2P is when you loan money to other people or businesses that are looking to get a better loan rate than with traditional banks.
There are quite a few popular online platforms that connect lenders with borrowers. Here are some of them:
The loan terms on these platforms are either 3 or 5 years. They all have different credit score requirements and APRs, so make sure to research every one of them before you decide which one to join.
P2P lending usually has a higher return of investment than other short-term investment methods but they also carry a much higher risk.
Sometimes, it might happen that a borrower cannot pay back their loan.
Because of that, it’s much better to lend smaller amounts, for example, $30 to $50 to multiple borrowers than a bigger amount like $1,000 to just one of them. This way, in case one of them doesn’t pay, you don’t get to lose too much of your money.
Another thing is that you can’t access your money for the duration of the loan term. So if you need to be able to get your funds out sooner, then you should look at other ideas from this article.
Best Short Term Investing, Key Takeaways:
There are many types of short-term investments, you can choose safe options like putting your money into a high-yield savings account or you can go to some that are riskier but with higher interest rates like corporation bonds or peer-to-peer lending.
Some of these short-term investments can be safer than others, so you should always pay attention to the risk factors involved and if you care about your funds being insured or not.
The best short investment for you depends on the risk you’re willing to take, how much time can you leave your funds to mature without withdrawing them, and your overall financial goals and health.
Whatever investment you choose, make sure to do a lot of research on it first, and also on the financial institution or platform that you’re going to put your money into.