Are short-term investments profitable?
Short-term investments are a great way to make money. But it can be challenging to know which short-term investments are the best for you.
Don’t worry. This article will break down the differences between short-term investments and help you decide what’s best for your needs. In this article, we’ll discuss more than ten options that may be perfect for you!
What are Short-term Investments?
A short-term investment is an investment that you can easily change back into cash – such as a high-interest savings account or a money market account.
You might need this money sooner rather than later, and it should be straightforward for you to access if you need the money back quickly.
However, just because you are investing for less than five years doesn’t mean there are not many options. Understanding the right option is critical.
Considerations to Make Before Deciding on Short Term Investments
How Long do you plan to keep your money in a short-term investment? – This is key to knowing the number of years that will help you decide the right risk factor and account that is right for you.
Understanding the difference between investment returns and interest rates. Another reasonable consideration is to make sure you fully understand the option you are going for. Interest rates are a low-risk option. You are going into an agreement knowing exactly how much interest you will earn. On the other hand, investments don’t come with a guarantee. Any dip in the stock market could take time to get your money back.
Are Short-Term Investments Profitable?
Depending on the amount of time you put your money in, the type of investment you go for will determine your profitability. It’s good to consider carefully before jumping in, and if you are in doubt, it’s worth consulting a financial advisor who could help you invest your money.
But yes, short-term investments are profitable, especially if you consider the alternative of not doing anything with your money short term even if you decide to put your money in a savings account with a low-interest rate that is still better than earning no interest.
If you consider annual inflation by doing nothing with your money, you are losing money because it is worthless when you add in inflation. So even if you do not have the luxury to invest for money, then five years of short-term investments are still worth doing!
Best Short Term Investments
Time is a crucial factor in deciding the best short-term investment. Based on the time you have to invest, see below which option could be right for you.
Less Than Two Years
Short-term investments that are less than two years are considered low risk and low reward. Potentially you can earn around 0.5%, which is a lot better than doing nothing with your money, so of course still worth doing something.
Online Savings Account
An online savings account can be a good option, especially under the year mark. They are low-risk and low reward options. But it delivers what it promises when you sign up to a guaranteed interest returns rate and can withdraw easily.
High Yield Savings Account
We have discussed savings accounts but make sure you compare all different options before deciding on a savings account. There are many choices, and online-only companies like Chip have been beating some of the traditional banks, so make sure you do your research and compare all options. If you decide to lock money away in a savings account, make sure you get as much interest as possible!
Money Market Accounts
Money market accounts are a short-term investment with the same risk as an online savings account but usually has higher interest rates.
With money market accounts, You can withdraw your money at any time without penalty and have access to it through checks or debit cards. The major downside of money market accounts is that it is a short-term investment is that you are limited to six transactions per month.
Cash Management Account
A cash management account is a short-term investment with low risk. This short-term investment can be a great option depending on the amount of money you have for short-term investments. The downside is that you need a high balance to enter into this type of short-term investment.
A cash management account can be a profitable short-term investment over a money market account because it has fewer transaction limitations and doesn’t require as high a balance as a money market account would.
Two to Three Years
Once you are over the 2-year mark, you could consider a more moderate risk to boost your returns. Potentially getting up to 4x a savings account (based on 0.5%). Options include:
Short-Term Bond Funds
A short-term bond fund is a short-term investment assuming that you want to invest in the short term until you need it.
This short-term investment is not as volatile as short-term stocks and has less risk of short-term bonds (depending on the company). The downside of this type of short-term investment is low returns.
There are limited options for short-term bond funds, so be sure to do your research before considering this option.
As the name suggests, government bonds are debt instruments offered by various governments to fund public spending.
Government bonds can allow governments and taxpayers to trade debt for other forms of monetary policy, such as quantitative easing or tax cuts. The idea is that providing investors with other forms of fiscal measures eliminates the risk and complications resulting from significant amounts of government debt (lowering unsustainable levels).
Money Market Mutual Funds
Money market mutual funds (MMMFs) are short-term investments that allow you to invest in short-term debt products.
There are various short-term debt products that money market mutual funds invest in, including commercial paper, certificates of deposit, and Treasury bills.
Typically, the short-term debt products that money market mutual funds invest in have maturities of less than 13 months.
Money market mutual funds are considered to be low-risk, short-term investments. The risk associated with money market mutual funds is typically lower than with other short-term investment options, such as short-term bond funds and short-term stock funds.
One of the benefits of investing in money market mutual funds is that you can purchase them through a brokerage account. That means that you have access to various types of Money market mutual funds, which gives you more options when choosing the suitable short-term investment for your needs.
Three to Five Years
If you want to keep your cash tied away for three to five years, you could look at medium to high-risk short-term investments. That is a better option than the long term, as you can still get returns over two years and not have to lock your money up for an extended period.
Certificates of Deposit (CDs)
A certificate of deposit, or CD, is a short-term investment offered by a financial institution, such as a bank or credit union.
A CD typically has a maturity of one year, but some CDs have maturities of two years or more.
When you purchase a CD, you agree to leave your money invested in the CD for the entire term. That means that you cannot withdraw your money just because you want to.
Peer-to-peer loans, also known as P-to-P loans, are short-term investments that allow you to invest in consumer and small business loans.
When you invest in a peer-to-peer loan, you invest in the loan itself rather than the borrower.
One of the benefits of investing in peer-to-peer loans is that these short-term investments allow you to choose the highest risk and return, depending on your short-term investment goals.
This short-term investment option has a high risk because it isn’t tied to the collateral like traditional loans; however, it can be very profitable.
Investors that are interested in short-term investments with higher risk and returns should consider peer-to-peer loans, which can offer up to lucrative annual interest rates for short terms of one year or less.
The disadvantages of peer-to-peer loans are that the loans are unsecured, so there is a higher risk of default. In addition, it can be challenging to track the performance of peer-to-peer loans because regulations are not as strict as other short-term investments.
More than Five Years
The stock market becomes a viable option if you can stretch over the five-year mark. Investing over five years in the stock market means you are much more likely to succeed as you have ridden the short-term ups and downs.
If you are interested in investing in the stock market, consider services like Motley Fool Stock Advisor, which gives you recommended stock picks by professionals. They are also handy guides to help you avoid investing mistakes. They will also tell you when the right time to sell is.
What Should be in Place Before You Start Investing?
Before you consider short-term investments, it’s wise to make sure you are in a position to do so by looking at your entire financial situation.
Make sure you pay off high-interest debts such as credit cards and student loans. You could be worse off by putting savings on any yet still paying high-interest amounts.
Consider short-term investments that offer liquidity, such as money market mutual funds. This means you can withdraw your money easily without paying too much in penalties if needed for an emergency or unexpected event. Make sure there are no withdrawal fees either!
If peer-to-peer lending is something you’re interested in, then make sure you have more money set aside for short-term investments. If your savings are limited, peer-to-peer lending may not make sense—the default risk on these loans is high. Losing all your money due to fraud or scams is a genuine possibility.
Advantages and Disadvantages of Short Term Investments
There are many advantages of short-term investments. Short-term investment accounts offer high yields and provide short-term investing experience with short-term investments.
The short-term investment is short-term savings account with a shorter than usual duration than other savings and checking accounts, making it an accessible short-term investment for many people.
Some short-term investments can offer higher interest rates than other savings accounts.
The disadvantages of short-term investments are that they usually have a lower rate than inflation, and short-term investment options may not be readily available to you depending on what type of account you open and where you live.
Investing in the short term is usually considered a safe investment.
Short-Term Investments Vs. Long Term Investments
Short-term investments have a short period of less than one year, while long-term investments usually take more than five years.
Short-term investment options allow you to boost your savings or check account with short terms of three months, six months, and twelve-month periods.
Long-term options are for more committed investors offering five years or longer short-term savings accounts and short-term investment options.
Longer-term investments are usually more lucrative, offering better returns, but the downside is that you will not have access to your money for a longer time. Whereas in the short term investing, you have access to your money, and it is earning more than nothing!
In an ideal world, it is best to do a mix of short and long-term investing so that you benefit from both options. If you consider investing long-term, it’s beneficial to read an investing book.
Many people want to invest in the stock market and other investments, but they don’t know where to start.
If you are looking for a low-risk investment, consider opening up a savings account or money market account.
Savings accounts offer higher interest rates than most typical checking accounts, so it is worth considering if you need some cash on hand for emergencies. On the opposite side of that spectrum, investing is always a risk because no one knows what will happen tomorrow, let alone next year!
Consider long-term investments like stocks and short-term ones like bonds. Depending on how much money you have available and how high-risk tolerance level is, you should also consider how long you plan to invest. The shorter the time, the more chance you have of losing money.
This article originally appeared on Savoteur and has been republished with permission.
Mary Elizabeth is a self-taught finance nerd and money master. At the age of 21, she bought her first house, and by the time she was 30 had paid off all student debt and saved 100k. She founded MeMoreMoney.com to help others achieve their own financial goals with uncomplicated advice that works for everyone from just starting out to those who have been saving for decades.