Almost without exception, any financial advisor will tell you to invest for the long run. In 90% of cases, people’s ultimate goal is to have a comfortable retirement. Even the best short term investments just aren’t the way to get there. The balance of risk and reward for each of them is different, but as financial instruments, they’re just not designed to suit someone who’s looking twenty or thirty years ahead.
Sometimes, though, whether you’re saving up for a major purchase or you just need a place to temporarily park money from some windfall, the next 6 to 24 months are all you need to worry about. Some people consider any investment strategy with a horizon of fewer than 5 years to be “short term”; the standard figure of 12 months is really an arbitrary number from the world of business accounting.
Table of Contents
- 1 What Are Good Short-Term Investments?
- 2 Examples of When (and When Not) to Consider Even the Best Short Term Investments in 2019
- 3 Important Note:
- 4 Paying Your Existing Debt Is the Best Way to Invest 20 000 Short Term!
- 5 High-Yield Online Savings Accounts Are Probably Better than What You Use Now
- 6 Certificates of Deposit Aren’t Short-Term High Yield Investments, But They Keep on Ticking
- 7 Money Market Mutual Funds: A Solid Option for Investing a Few $10,000s
- 8 T-Bills: The Nearest Thing to Rock-Solid
- 9 Foreign Government Bonds May Actually Be the Best Way to Invest Money Short Term
- 10 Corporate Bonds: Sometimes Good, Sometimes Bad, Sometimes Ugly
- 11 Junk Bonds: Scraping the Bottom of the Barrel?
- 12 Roth IRA: Actually for Retirement, But There for You If You Need It
- 13 Precious Metals: Where to Invest 50k for 1 Year When Nobody Knows What’s Going to Happen
- 14 Peer-to-Peer Lending: Make Money by Being a Good Neighbor
- 15 Cryptocurrencies
- 16 How to Manage Your Short-Term Investments
- 17 Final Words
What Are Good Short-Term Investments?
From one point of view, the definition of a “short-term investment” is simply its name: it’s the best way to invest money short term to achieve whatever your financial goals are. More commonly, though, short-term investments have the following characteristics:
All Short Term Investment Options Have Relatively High Liquidity
You may not be able to draw funds out of your chosen investment vehicle at an ATM, but you will probably be able to access your money by requesting it 30 to 90 days in advance, or by selling the asset or instrument representing the investment. Be warned, though: a penalty fee or discount of some sort probably applies. This should be your last resort, especially since you’ll be seeing the full amount in a few months anyway. It might be better to apply for a personal loan instead.
Low Risk is Usually a Requirement
With most good short term investments, you’re either guaranteed your money back or at least won’t lose the farm. This is true even if interest rates go down or the stock market steps on a banana peel. When you take a long-term view of an investment, you have time for it to recover from a dip; not so in a shorter timeframe. Some people, though, don’t just need a place to park their money; they want to see it grow as much as it can in a year, even if this means risking losses.
Unspectacular Returns Are Par for the Course
Like the flipside of accepting the only limited risk, short-term, high-yield investments are relatively rare. Whether guaranteed or floating, the interest your money will earn is generally slightly better than a traditional savings account. Treasury bill yields are a typical benchmark when comparing the performance of different types of short-term investments, but these don’t necessarily track the interest rates banks offer very closely. This means, at least at present, that you’d be lucky to beat inflation – it’s just not a saver’s economy.
Examples of When (and When Not) to Consider Even the Best Short Term Investments in 2019
- You’ve just received a lump sum of cash: an inheritance, a retirement plan you were forced to liquidate for some reason, or maybe you won the lottery. Being financially responsible, you want to invest it with a view to cashing out 10 or 20 years in the future, but you also want some time to do your homework.
- The amounts you’ve squirreled away into your savings account each month have built up into a substantial sum. It’s time to look at safe ways to earn more interest on this money.
- You’re saving up for a specific goal, perhaps a wedding or a new car, and you don’t want the temptation of having that money where you can get to it easily. We’ve all been there.
- You want to start investing in real estate, either alone or as part of a consortium. You’re also smart enough to know that, with property, you make your money when you buy, not when you sell. You’re waiting for the right opportunity to come by, and you need a place to store your capital where you can cash it out within two or three weeks.
You should not go for a short-term investment if:
- If you have less than 3, or ideally 12, months of living expenses in the bank, it’s too early to start thinking about investing. That’s your emergency cushion and you might need to draw on it in a hurry.
- Perhaps you know or suspect that you have a major expense coming up. If, say, the IRS is asking questions about your last return, it’s better to wait until you know what your cashflow will look like over the coming months.
- In case you’re reasonably happy with the interest rate you’re getting now and you’ll probably want to access those funds within a short time. It often costs you a small percentage of the total amount to move money from one place to another, so these fees should be included in your planning.
Some of the options described below entail a greater amount of risk than most smart amateur investors are likely to want. Some of them fall firmly in the “alternative” category, which even people with a great deal of financial experience tend to avoid. This article provides a brief snapshot of some of the opportunities out there and aims to give a broad spectrum of the best short term investments in 2019 has to offer, including some you normally wouldn’t think of. None of the following should be taken as a recommendation that’s suitable for you personally. You should really seek competent advice tailored to your financial situation and goals before making any major financial decisions.
Paying Your Existing Debt Is the Best Way to Invest 20 000 Short Term!
If you were shown an investment opportunity that’s 100% guaranteed and also carried a high interest rate, you’d be a fool to decline, no? Why, then, do many people start investing while they’re still carrying expensive debt?
If anyone recommends that you do exactly that, ask them whether they work on commission. Take a look at the following calculation to see what happens when Jimmy Jules has $10,000 and chooses to pay off his debt, highest interest rate first, versus investing in a conventional short-term instrument:
It may seem to you that having $450 more at the end of the year isn’t all that much. Still, this is only one of the financial decisions our friend Jimmy will make during that time, and these amounts add up very quickly.
High-Yield Online Savings Accounts Are Probably Better than What You Use Now
Ever wondered why banks chain up their pens? They, like all of us, are just trying to save money, one Bic at a time.
The plush carpeting, marble facades and massive advertising campaigns some banks use to project an atmosphere of dependability aren’t cheap. The bank’s customers finance trimmings like these with transaction fees – basically, you’re paying for them to promote themselves – to you!
Online-only banks have much lower overheads, and even traditional banks have found that online accounts cost them a lot less to manage. Some of these savings are passed on to their customers in the form of higher interest rates: apart from paying off your debt first, switching your account to them is one of the easiest and best short term investment options you can possibly embrace in 2019.
At present, the national average interest rate for savings accounts is only 0.1%. Inflation is at 1.9%, meaning that in real terms, you’re actually losing instead of earning money. Online accounts often offer rates of 2% or even higher: your money will earn 2.3% (APY) at HSBC with few strings attached. Assuming that you start with at least $25,000 and/or deposit $100 every month, CIT will go up to 2.4%.
Don’t, however, get blindsided by opening an account that has only a high interest rate going for it: some online banks charge zero transaction fees, while others don’t allow ATM withdrawals (you have to transfer money to a checking account instead). Also, make sure that the bank is FDIC-insured. This means that the government will refund all of the money in your account even if the bank goes bust.
Certificates of Deposit Aren’t Short-Term High Yield Investments, But They Keep on Ticking
As the hare in the story learned to his cost, it’s sometimes slow and steady, not speedy and spectacular, which wins the race. If you got your ideas about investment from the movie “The Wolf of Wall Street”, CDs probably won’t appeal to you, but they’re worth a look for anyone else, unsophisticated and experienced investors alike.
The basic idea behind certificates of deposit is that banks have to control a certain amount of depositors’ cash in order to stay in business. If they have plenty of other people’s money on hand and they’re reasonably sure it will stay where it is for a while, they can use this to make high yield investments, including making loans.
These deposits are a liability for the bank – they owe the money to their customers, many of who can withdraw it instantly. If there’s a “run on the bank” and a large amount of deposited cash is withdrawn quickly, the bank might actually run out of liquid money and be unable to honor some of their agreements.
To limit this risk, banks will essentially pay you to keep your money with them if you promise that you won’t withdraw it for some period of time. This may be anything from one month to 5 years, with longer timespans paying higher interest rates. These aren’t great, though: expect to be offered around 0.8% for a 12-month CD. On the other hand, at least the FDIC guarantees CDs up to $250,000, so even if the bank literally goes kaboom, you will get your money back plus interest.
Shop around: there are huge differences in what different banks are willing to give you. At the moment, BMO Harris is offering 2.75% on 1-year certificates of deposit (minimum $1,000), while Barclays can do 2.6% with no minimum.
Money Market Mutual Funds: A Solid Option for Investing a Few $10,000s
Just like you would exchange dollars for euros (or whatever) when traveling, there’s also trade in “now-money” and “then-money”. This is exactly what happens when a bank grants you a mortgage or short-term loan, and in exactly the same way, “now-money” is worth more than “then-money” – interest, in other words.
When a company or government doesn’t have enough liquid cash immediately available to cover their short-term expenses, they turn to the money market. Because this shortfall is only temporary and they have enough assets to cover their liabilities (just not in a form they can use right at the moment), money markets are extremely safe investments. Money market instruments are similar to bonds, but with one important exception: they typically mature in no more than a year.
These transactions are too complicated for a private individual to handle, but there is a simple solution: investing in a mutual fund. This means that you keep your money in a professionally managed institution that seeks out opportunities while taking a small fee. Unlike with many investments, a share is always nominally worth $1; any gains are paid out in the form of dividends. This leads to an important consideration: money market funds are very reluctant to “break the buck” and devalue their shares. In other words, their primary objective is to not lose money, not chase the highest interest rates. They do offer better returns than savings accounts but aren’t federally insured.
Since these funds lend to cash-strapped corporations rather than individuals, they work with large sums. This means that minimum deposit amounts apply (essentially just to keep their administration costs down), but a money market account is one of the best ways to invest 20,000 short term if you have it. If this is too much, ask your bank what kind of money market accounts they offer. These are a kind of a hybrid between a money market mutual fund and typical savings or checking account.
T-Bills: The Nearest Thing to Rock-Solid
The U.S. government, like almost all governments, needs to borrow money to survive. One way in which they do this is by selling their future tax income to investors today in the form of Treasury Bills.
The interest these instruments carry is determined at the weekly auctions where they are issued. (Technically, this is actually a discount: if you buy a $10,000 T-bill at 0.2%, you pay $9,980 for it and get ten grand when it comes due). They mature in anything from four weeks to a year. Since they are guaranteed by the “full faith and credit” of the government, trust in them is so high that is often called “risk-free”.
The main drawback to this type of investment is that returns are very low compared to, say, CDs. You can bid on treasury bills directly on the Treasury website. If you prefer to keep your money local, you can also find similar (but usually longer-term) instruments issued by municipal and state governments.
Foreign Government Bonds May Actually Be the Best Way to Invest Money Short Term
Just like Uncle Sam borrows money, including from ordinary people like you, other governments do too. The difference is this: U.S. T-bills and bonds are if you’ll excuse the pun, the gold standard of government debt. Other countries, particularly those in the Third World or suffering from political instability, aren’t quite as certain to pay back their loans on time.
As always, though, this increased risk means that they have to offer higher interest rates to get investors to bite. Take a look at the table below:
All the above bonds are for sale to retail investors, but you have to do your homework even more diligently than usual with this kind of investment. In particular, it’s hard to figure out what’s really going on in a country you’ve never heard of, assuming you can even find it on a map. The stories you’ll see in the Western media just don’t give you enough background to understand the political and economic situation in far-off places like these, nor which way things are likely to go in the next 6 to 12 months. Also, some of these bonds are denominated in the local currency, meaning that a change in its dollar value will either hurt or help you.
On the other hand, it is possible that some of these countries are merely suffering from adverse sentiment – a gut feeling a majority of investors have that may or may not be based on anything at all. Remember: big returns imply big risks, but this isn’t a one-to-one correlation. Clever investors find the imbalances in valuation that others only see months later. If you think you have the smarts to do this…well, it’s your money to risk. Alternatively, you may prefer to buy shares in an American foreign bond fund, which actively manages these tricky investments on your behalf.
Corporate Bonds: Sometimes Good, Sometimes Bad, Sometimes Ugly
The three traditional investment categories are stocks, bonds and “cash and equivalents”. The last one is mainly an accounting term stating where these assets end up on a company’s balance sheet; all short-term (less than twelve months) investments technically fall under this. Stocks, though some people use them as a short-term investment, are risky, difficult to understand and usually better to hold for several years.
That, for ordinary retail investors, leaves bonds. These are not quite as safe as money market funds, but a lot less risky than stocks or alternative investments. They are issued by governments and also private enterprises. While these turn to the money market for quick, short-term cash, they issue bonds for longer terms, perhaps to fund an expansion of their operations.
Though the way in which these contracts are written varies, the usual arrangement is for the investor to hand over a lump sum. The issuing company then makes interest payments at specified intervals (bi-annually or quarterly) and returns the principal when the bond matures. Each bond is issued a credit rating, usually by Moody’s or Standard & Poor, which is a very reliable way of seeing whether the return offered is fair.
Bonds take several years to mature (bonds with a maturity of 270 days or less are referred to as commercial paper), but they’re also a short-term investment because they can be sold easily. Unfortunately, there’s no central marketplace for them, as there is for stocks. You’ll have to visit a broker and, unless you trust him implicitly, visit the Financial Industry Regulatory Authority website to check whether you’re receiving a fair price.
Junk Bonds: Scraping the Bottom of the Barrel?
Smaller companies, or those in distress, have a completely different risk profile and credit rating, and therefore have to work a lot harder to borrow money. Though similar to normal bonds in most ways, the “high-yield” or speculative bonds they issue can offer interest rates of as high as 10% or more – but there is a downside.
Junk bonds are not, it should be very clearly understood, for everybody, and definitely not recommended for anyone with a heart condition. There is a substantial chance that you will lose – not just 10% or so of your principal, but all of it. It’s not a short-term investment vehicle you would put your life savings into. Still, this asset class is so often overlooked that it’s worth mentioning here – if your bank account can absorb the potential loss and you have some faith in the particular company, you might choose to take the chance.
Something, in particular, has to be emphasized here: the American business sector, as a whole, is hugely indebted at the moment. In normal times, the default rate on speculative bonds is well under 10%, but if the economy hits a speed bump, it’s likely that the dominos will start toppling, and junk bonds will be the first to fall.
Roth IRA: Actually for Retirement, But There for You If You Need It
Roth IRAs have usually mentioned in the same breath as 401(K) plans, the major difference being that contributions to the former are taxed now while 401(K)s are tax-free until you start withdrawing money. As such, it’s meant as a savings vehicle for retirement, but it can serve as a kind of jury-rigged short-term investment.
Unlike with a 401(K), you can withdraw money from a Roth IRA without being liable for penalty payments or paying tax on what you take. Generally speaking, you can request any amount of funds up to what you’ve already paid into this type of IRA, at any time, but earnings (i.e. interest payments) can’t be touched until you’re 59½ years old and have had the account for at least 5 years.
If you need access to the earnings portion of your account (which can be pretty substantial if you’ve had it for 20 years or more), things get a little more complicated. You might have to pay income tax as well as a 10% surcharge on everything except what you put in. There are a couple of exceptions, though:
- The beneficiary is dead or permanently disabled;
- The withdrawal(s) is to pay medical expenses (additional conditions apply);
- You’re buying your first home;
- The withdrawal is to cover college expenses, including textbooks and the like.
The rules surrounding “qualified” and “non-qualified” Roth IRA withdrawals can get pretty complicated. Anyone can go to the bank and buy a certificate of deposit or open a money market account, but it’s a good idea to talk to a professional before touching your IRA, or 401(K) for that matter.
Precious Metals: Where to Invest 50k for 1 Year When Nobody Knows What’s Going to Happen
Gold’s time to shine, if you’ll excuse the pun, is when there’s major uncertainty around the fate of the U.S. dollar, which is still effectively the reserve currency of the world. Many of you will remember the best recent example of this, namely what happened during the 2008 crisis:
A 250% increase in value over 3 years is certainly nothing to sneeze at.
One way to invest in gold and silver is to buy jewelry, but this is problematic. A necklace’s value isn’t determined only by the amount of shiny stuff it contains, and it’s also not very liquid – i.e. more difficult to sell for a fair amount.
A better way is to buy shares in a gold-based EFT [An Exchange Traded Fund is simply a company that owns a basket of securities in some given area, which individuals can buy shares in.], which tracks the price of gold closely. Importantly, these have professional management teams able to take advantage of market fluctuations as they happen.
Peer-to-Peer Lending: Make Money by Being a Good Neighbor
Banks started out as places where lots of people could each deposit a little money, which could then be lent out to others at interest. The gains realized in this way were divided between the bank itself and its customers. Peer-to-peer lending follows pretty much the same concept – just minus the actual bank.
The most important difference between the two systems is that, unlike in a centralized system, peer-to-peer lending doesn’t necessarily spread the risk of the lender defaulting among many different people. You will generally make the loan to another individual, meaning that you will have to research the deal yourself and assess how likely it is that they’ll be able to repay the money you invest in them. It is, however, possible for several investors to pool their funds in order to finance a large loan – you can even apply for home loans.
The platform you choose does help mitigate the risk somewhat: the borrower’s details are verified, their credit history is evaluated and a fair interest rate suggested. Depending on which online service you use, this will be reflective of:
- Their credit rating;
- The amount to be borrowed and how long they have to pay it back;
- Their educational level and employment status;
- The purpose of the loan and whether collateral is being supplied.
For their trouble, the platform typically takes 1% (of the interest amount, not the principal). Unlike a bank, they don’t manage every loan they facilitate. They only do basic credit checks on prospective borrowers and act as a matchmaking service. Some do have some kind of insurance against loan defaults, but in general, you have to take whatever steps you think appropriate to protect yourself.
Electronic wallets, blockchains, initial coin offerings: if you don’t understand what these really are, don’t worry: few people do.
Cryptographic currencies do offer the possibility of astronomical returns, but they can crash just as quickly, often for no apparent reason at all:
More than one person has either lost their shirts or made serious bank playing the crypto market. Even if you know what you’re doing, this is more like gambling than investing, but you might want to put a small amount of cash into these new-fangled currencies just in case they shoot through the roof next month – then take the profit and get out.
How to Manage Your Short-Term Investments
Risk and How Much of It You Should Tolerate
Let’s say you’re wondering where to invest 50k for 1 year. You want stunning returns along with iron-clad security…but if you’ve even glanced at the rest of this article, you know that’s not going to happen.
Before deciding on an investment strategy, the first thing you have to determine is how much risk you’re willing to accept. As a rule of thumb, the older you are (and therefore the less time your retirement hoard has to recover from a setback), the more conservative you want to be. To put the same concept in a slightly different way: if you’re close to having to draw on rather than build up your portfolio, or you don’t have a consistent income, think very carefully about the maximum amount you can afford to lose. With some of the investments described above, you can literally lose 100% of the money you put in. These are not good places to store your entire nest egg for a few months.
Diversifying: Not Getting Caught With Your Pants Down
Closely related to the idea of risk is that of diversification, or, in simpler terms, not putting all of your eggs in the same basket. Ideally, you’ll spread your money around several investments carrying different amounts of risk, some of which will usually rise when others fall. If interest rates go up, for instance, property values may go down while floating-rate bonds increase in value. Let’s look at how two arbitrary scenarios will affect Nicole Nibblesticks, who placed 20% of her $100,000 in a volatile instrument and the rest in a more stable one:
Even though these represent two very different economies, she still manages to protect her money using the power of diversification.
If the basket you choose for your nest egg is a pretty durable one, like Treasury bills or CDs, you needn’t lose sleep over its fate, but you also won’t see the best possible returns. If you place all your free cash into something more lucrative but uncertain, there’s a good chance of you taking a major hit.
Above all, when managing your short-term investments, do the math. Don’t entrust anyone else with this, especially if they’re trying to sell you something – most financial “consultants” work on commission and don’t necessarily care about helping you make the best decisions.
We hope you’ve found the above informative, or at least interesting. We try to look at topics like these from all angles. After all, a 60-year-old who’s married and owns their own house will have different priorities than someone who’s just finished college. Regardless of which describes your situation better, there is plenty of stuff that everyone should know about personal finance. If you’d like some more clear, actionable advice, please subscribe using the form below.