Looking for the best short-term investment?
If you’re here, you’ve probably decided to join millions of people investing short-term.
However, if you want to join the investors – you need to understand some of the best short-term investments that’ll motivate, inspire, and kick your butt in 2020
Here’s the thing.
Some short-term investments work better than others. It’s not just about the return (though that’s important!), it’s also about helpful features like liquidity, the security of your money, and inflation protection.
So, where’s the best place to invest money right now?
To make your decision a lot easier, we’re going to take the most common short-term investment options, add a little curation, and break down each feature that matters most to you.
And, all that is to help you make a decision.
By the end of this post, you should be able to pick the best way to invest short-term while still reaching your financial goals.
But first, let’s learn some short-term investment basics.
What Is a Short-Term Investment?
They are an investment you make for less than three years. They’re also called marketable securities or temporary investment.
Common types of short-term investments include money market accounts, CDs, high-yield savings accounts, treasury bills, and government bonds.
Why Make Short-Term Investments?
You may invest short-term to protect your capital while generating a return similar to a Treasury bill, index fund, or the same benchmark.
Every investor’s primary goal is to make the highest return possible.
But, when investing short-term, other goals trump returns.
- Liquidity – How quickly can you access your money? What is the cost of early withdrawal?
- Inflation protection – Investing your money will always involve some level of risk. But keeping it in cash loses your money to inflation.
- You do not want to lose money – You can’t afford to wait out market dips in long-term investments and possible high returns.
Best Short-term Investments in 2020
The best short-term investments are those that provide you with a decent return while limiting your risk exposure.
Here’s a list of the best short-term investments you can make.
- Certificates of Deposit (CDs)
A certificate of deposit (CD) is a special savings account you open with banks and credit unions.
Tying up your money for one to two years could be a way to stop dipping your hands in your savings prematurely. It’s a perfect way to save for an emergency.
CDs are best for small investors because they do not require a large minimum deposit and offer competitive yields. You can also find others who have no minimum deposit requirements.
Also, they are your perfect choice if you have a low-risk tolerance and want a fixed return – although they have some exceptions depending on your bank.
Are certificates of deposit worth it?
- Fixed-rate CDs returns are guaranteed, especially if you keep your money full term.
- Your principle is safe since they are FDIC and NCUA insured.
- You also earn more when CD rates go up.
- Online banks tend to pay a higher APY than brick and mortar banks. Online banks have lower overhead costs and can pass the savings to you in the form of higher rates.
However, you incur a penalty should you want to withdraw your money before maturity.
Plus, the rate of return is usually lower than the inflation rate.
If you are looking for CDs with the highest yield, your best bet is to compare rates online banks offer. Credit unions also offer competitive rates.
- Treasury Securities; Safe Havens
When it comes to your savings, safety is the name of the game. The last thing you want when building your savings cushion is to lose it all and return to zero.
Fortunately, treasury securities are your number one financial instrument that rewards your efforts with little extra money in the form of interest.
Treasury securities include banknotes, Treasury bills, Treasury bonds, and Treasury inflation-protected securities. They are government-issued debt – meaning you loan the government money.
Treasury bills are short-term investments whose maturity ranges from a few days to 52 weeks and are sold at a discount value.
To buy Treasury securities, you buy them at a discounted face value. For example, if the face value upon maturity is $1000, you may purchase it for $975, but the Treasury pays you $1000 at maturity. So you earn $25 on your investment.
Key facts about treasury securities
- Risk-free because they are government-backed. You can be sure of getting your principal back and interest at maturity.
- Highly liquid – Treasury securities are liquid, but you may experience some gains or losses if you decide to liquidate earlier.
- Affordable for an average investor.
- Some treasuries like Treasury Inflation-protected Securities (TIPS) offer protection against inflation.
We’ll discuss TIPS later in detail later in this article.
You can buy Treasury securities from the Treasury, on secondary markets through your brokerage account or financial institution
Even though Treasury securities are among the lowest paying, they are still better than traditional savings accounts, money market accounts, or CDs.
- Short-Term Bond Fund
A bond is a loan to the government or corporate that pays back a fixed rate of return.
Short-term bond types are; Government bonds, Municipal bonds, and corporate bonds.
However, government bonds (issued by the government) or municipal bonds (issued by the states and cities) are more secure than corporate bonds.
Corporate bonds – They are issued by major corporates to fund their investments. They’re safe and pay interest at regular intervals, either quarterly and bi-yearly.
They consist of a collection of bonds from many different companies across many industries and company sizes.
Diversification cushions you from risks of non-performing bonds within your portfolio.
They are highly liquid – you can buy and sell any day on the stock market.
However, short-term corporate bonds are not insured by the government so that you could lose money. But you can mitigate this by buying a broadly diversified collection.
Government bonds – Similar to corporate bonds but issued by the federal government and its agencies.
They fund investments in T-bills, T-binds, T-notes, and mortgage-backed securities from government-sponsored enterprises.
Government bonds are not FDIC backed, but you can trust the government’s promise to pay. Also, you take a low amount of interest rate risk, meaning the fluctuation of interest rates does not have an adverse effect on bonds.
They are highly liquid because they are widely traded assets on the stock exchanges.
- Peer-to-Peer Lending & Crowdfunding Loans
It’s a short-term investment that enables you to lend money to borrowers through online lenders. Such loans are usually short between six months to five years.
Let me clarify.
Peer to peer lending and crowdfunding works the same way as banks. The only difference is that FDIC insures the money in your bank account, but you receive little to no interest.
But on peer to peer or crowdfunding, your money is not insured, and the risk is also higher should a borrower default. However, you earn a much higher return if they pay.
Remember, every investing platform works differently, so vet them thoroughly before you invest.
- Money Market Accounts (MMA)
A money market account (MMA) is an interest-bearing account at a credit union or bank. They pay higher interest rates than the savings accounts and typically require a higher minimum investment.
However, a money market account should not be confused with a money market mutual fund. We will discuss that shortly.
Most MMAs require a minimum deposit, and they restrict withdrawals each month.
They can limit your withdrawals based on the number of transactions, a specific dollar, or both.
They may not be suitable if liquidity is essential to you; however, they are still more flexible and liquid than CDs.
The FDIC also insures money market accounts, significantly reducing your risk.
- Money Market Mutual Funds
Money market mutual funds is another short-term, and higher yield saving option. Money market mutual funds are mutual funds that purchase short-term, high-quality debt from the government municipalities and corporates.
Money market mutual funds have tax benefits too. They hold municipal securities that are tax-exempt from federal and state taxes. However, FDIC doesn’t insure them and carries risks similar to short-term bonds.
You can purchase bond funds or money market funds via an online brokerage account
- Roth IRA
Roth IRA is an individual tax-free retirement fund with many investment possibilities.
It’s a short-term investment because you can withdraw your contributions any time without a penalty to pay for qualified education expenses. Your earnings remain in your Roth IRA account and keep growing tax-free for your retirement.
Investment options in a Roth IRA include stocks, bonds, EFTs, CDs, and money market funds.
- Online Savings Accounts
Online savings accounts are short-term investment options with high returns.
They pay more than what traditional banks would pay on a savings account and are FDIC insured, making them a safe investment.
Most online savings accounts do not require a minimum deposit and do not charge monthly fees.
They are highly liquid, meaning you can access your money any time you want. Even though returns are not as high as other short-term investments, online savings accounts are suitable if liquidity is a key goal for you.
- Arbitrage Funds
Arbitrage funds take advantage of a small difference in stock prices either between shares of a company, two stock exchanges or between the current cash price of a stock and its future contract value.
The fund executes the purchase and sale simultaneously – dropping the risk far below that of a traditional stock fund.
Let’s say company A trades on both the London Stock Exchange (LSE) and the New York Stock Exchange (NYSE). Company A’s stocks sell for $35.15 per share on NYSE but at $35.30 per share on LSE.
The fund buys shares of $35.15 per share on NYSE in bulk and simultaneously sells the same number of shares at $35.30 per share on LSE- pocketing the difference.
Arbitrage funds are the best when the market is experiencing high volatility.
- Treasury Inflation-Protected Securities(TIPS)
TIPS are government bonds indexed to inflation. The interest rate on TIPS is fixed, but the underlying value of the security rises with inflation as measured by the Consumer Price Index.
So you may only earn 0.5% in interest (paid semiannually), but the value of the bond may increase by 2.5% per year.
At the end of the term, say five years – your initial investment will be worth as much as it was when you first invested plus a small bit of interest on the principle.
You can buy TIPS directly from theTreasury. However, TIPS interest is taxable, so most investors prefer to invest in a TIPS ETF or mutual fund.
To purchase shares of an ETF or mutual fund, you will need a brokerage account.
Before You Invest – Pay Off Debt
Look at your debts.
Do you have any high-interest credit card debt and other unsecured loans?
You are better off using your extra cash to pay off debts rather than saving or investing.
It doesn’t make economic sense to invest and earn 2% on a CD and continue paying a 20% interest rate in a credit card debt. Instead, you will be losing 18% on your money.
However, if you will be accessing the money in under a year, then paying off debt isn’t an option. That’s why it’s essential to understand your personal finance needs before committing your money anywhere.
What is the best investment option for the short term?
As you can see, we have tons of short-term investment options to choose from – and where to invest money in 2020 is entirely up to you.
But here’s the thing.
If you’ll need to withdraw money sooner than later, then an online savings account would be the best.
They also have an excellent return and give you quick access to your money without penalties.
Otherwise, with one of the short-term investments on this list, you can be confident that your money is safe and has the foundation that sets you on the path to investments.
All you need to do is pick the best short-term investment that’s right for you, sign up, and start building your investment portfolio.
See which one of these fits your goals?
Let us know in the comments section which one you like best.