Investments are often seen as a strategy for your long-term financial gains. That is because lower-risk short-term investments usually yield lower returns if compared to long-term strategies. Yet, that doesn’t mean there aren't ways to save and grow your money in the short term. It can be challenging for some of us to put a significant amount of money aside for more than a year. At the same time, leaving money sleeping in a checking account is not the answer. You will not only be missing opportunities to grow your finances, but you can lose purchasing power due to inflation.
There’s never been as many short-term investment opportunities as nowadays. This article will list and explain some of the safest short-term investment options you should consider.
Long-term investing is often about picking a strategy and sticking to it, holding on to some selected stocks, and navigating the ups and downs of the markets. Because the investment horizon is so large, short-term losses are acceptable and may one day turn into solid profits. Short-term investments, on the other hand, have other aspects to take into consideration. Even though there is no specific investment that fits everyone’s financial needs, there are some factors that you should analyze before jumping into a short-term investment.
One of the main reasons to go for short-term investments instead of long-term is the need for liquidity. Thus, you will want to make sure that the investment you picked offers a format and maturity date that fit your needs for the close future. While deposit accounts usually give you access to your money whenever some can charge a fee or a penalty for early withdrawals. If you go with another format, you should check how easy it is to cash out from it, because some investments will be simpler than others. Make sure the maturity dates of your investment meet your plans, otherwise you may find yourself not being able to access the amount you need the moment you need it.
Short-term investments can be a great way to escape inflation and outperform the returns offered by checking accounts. On average, from 1914 to 2020, every dollar left in cash lost 3.24% of its value per year. Consequently, you will want to ensure that your return on investment is at least higher than the inflation rate. As a rule, the higher your return means the higher your risks. Yet, there are many short–term low-risk investment opportunities that you can explore. Remember, investing money will always involve some degree of risk, no matter how small. But when you fail to invest, you don’t risk loss; you guarantee it.
As cliché as it is, Warren Buffett's famous quote about his rules of investing is always important to remember: “The first rule of investment is don’t lose. And the second rule of investment is don’t forget the first rule. And that’s all the rules there are.” When it comes to short-term investments, this advice deserves double attention. If someone could wait for the ups and downs of the market, they would invest long-term to benefit from higher interest rates and returns. If you are investing short-term, you probably can’t afford to lose much – or any – money. Thus, it is important to research the investment route you are considering, so you understand its risks before placing your wealth in it.
Now that you know what to consider when investing short-term, you can go through some of the safer options for this type of investment. Each person has their own financial needs, but if you are averse to risk, analyzing some safe options can be interesting. Finally, here are some of the safest investment opportunities if you plan to cash out in less than 12 months.
High-yielding savings accounts are one of the safest short-term investments you can choose from. Most of these accounts offer some kind of insurance and tend to be considered low-risk investment alternatives. Attention to the fact that online savings accounts offer higher returns than traditional savings accounts as they don’t have the expenses of a physical bank operation. A digital savings account can offer rates from 1.80% to 2.25%. Some online savings accounts offer even higher interest rates than that, going as high as 10%. But these higher rates will probably come with a higher risk, so it’s important to pay attention to the insurance they offer.
Online providers typically run leaner operations than their brick and mortar peers, which enable these players to offer low to no fees. In addition, many digital savings accounts have no minimum amount to open your account.
f you have a bit more funds, money market accounts are also considered a safe haven. They are very similar to high-yield savings accounts, but with a minimum deposit, limited withdrawals, and sometimes even a minimum balance each month. Withdrawals can be restricted to the number of transactions, dollar amount, or both. This means that they don’t have the same liquidity as the prior, but offer more access than some of the options to come.
If a minimum balance is required and you fall under it, you may be subject to penalties or receive a lower interest rate. If you follow the rules, however, the interest rates of this type of account can be good, more often than not above inflation. Most money market accounts offer insurance, many of which are from the Federal Deposit Insurance Corporation (FDIC). This makes money market accounts a relatively safe short-term investment.
If liquidity is not your priority, certificates of deposit can be a short-term investment alternative. CDs are insured by the Federal Deposit Insurance Corporation (FDIC), which makes it quite a reliable investment. The interest rates of CDs used to be great, and up to 4% at some point, but this changed recently. Since the beginning of 2020, CDs’ interest rates have been slashed to between 0% and 0.25%. This means right now CDs are not returning the inflation rate. Yet, this is something that can change in the future, so it is interesting to know this is an option. In addition, short-term CDs, with a fixed term of a year and less, will probably offer lower interest rates than long-term CDs.
Another downturn of CDs is that they don’t offer liquidity during the maturity period of your investment. Your money will be locked during the fixed period of your CD, and withdrawing it earlier can result in fees and penalties. In other words, don’t put your emergency fund in a CD. In sum, this is not the moment to invest short-term on CDs, but the scenario can change in the future. If interest rates are better again, CDs are an extremely safe and interesting route for short-term investment.
Treasury Bills are short-term bonds sold by the US Treasury. They have maturity periods that range from only a few days up to a year. Just like CDs, the longer the maturity period of a Treasury Bill, the higher the interest rate. Whenever you buy T-Bills, you pay a discounted price of their face value. The Treasury usually sells them in increments of $1,000. So a $1,000 face value upon maturity T-Bill might cost you $975. But when it matures, the treasure will pay you $1,000.
Since T-Bills are backed by the US Treasury, they are among one the safest investments. But because they are so safe, the interest rates are not that high, although they sometimes have higher rates than savings accounts, money market accounts, and CDs. You can buy a T-Bill directly from the Treasury or on a secondary market through a brokerage account.
If you are looking for a short-term investment in order to not lose money to inflation, then-Treasury Inflation-Protected Securities can be worth taking a look at. This type of US Treasury bonds’ returns follows the inflation rate measured by the consumer price index (CPI). This means that, with TIPS, if the inflation goes up, you get paid more; if it goes down, you get paid less. This option obviously won’t make your money grow much, so if you want to make money with a short-term investment, this is probably not the option for you. But TIPS does secure your money won’t lose value to inflation. TIPS originally sells for five-, 10-, or 30-year terms, but you can buy and sell them on the secondary market at any time. This makes TIPS more liquid than a CD.
If your goal is to have high returns and you can afford to have some money locked for over a year, long-term investments are probably a better option. However, many people don’t fit that profile. You might need liquidity in case of an emergency or an unexpected investment opportunity. You can also not be able to afford to have a significant amount of money locked. You can even just be looking for an investment that will repay the inflation loss in the near future. Whichever situation, investing short-term is a great way to balance liquidity and interest rate. Regardless of the returns, short-term investments will almost always be better than having your money sitting in a checking account.