Thursday, 19 September 2019

7 of the Best Short-Term Investments You Can Make

7 of the Best Short-Term Investments You Can Make
23 Jan
5:57
cartoon man thinking about what to invest
Many investors set aside money for long-term goals like retirement, which could be 30 years or more in the future. That means looking for investments, such as stocks and stock mutual funds, that have the potential to earn high long-term returns from dividends and capital gains.

But what about short-term investing? Short-term goals (generally considered to be five years or less) include things like setting aside money for a down payment on a house. How you invest this type of money differs considerably from long-term investing.

Short-term investments have some easily recognized characteristics. They are liquid, meaning you can access your money quickly and easily at little or no cost. Most investors also prefer their investments to be relatively safe since there isn’t much time to make up for losses. That’s why many short-term investors prefer options like checking and savings accounts and certificates of deposit (CDs).

The risks of short-term investing are typically lower than those you might encounter with long-term investments. Since most short-term investments earn interest, you do face the risk that rates will change and impact the earning power of your investment. But because investments like six-month CDs have such a short lifespan, the interest rate risk is minimal.

7 of the best short-term investments to consider

1. Money market funds

These fixed-income mutual funds invest in short-term debt securities that are relatively liquid, meaning they can be easily converted to cash. Money market funds aim for a steady net asset value of $1.00 per share. They distribute income from the securities they own, such as CDs, corporate commercial paper, U.S. Treasury securities and similar short-term holdings, based on the number of shares you own. Because money market shares are actively traded, you can sell them and access your money at any time without penalty.

Money market funds invest in a variety of assets. For example, prime funds invest in a diversified portfolio of short-term vehicles, such as those listed above. Government money market funds invest their assets in cash and U. S. government securities. Municipal money market funds invest predominantly or exclusively in securities issued by state and local governments that are free from federal taxes (and sometimes from state taxes).

Money market returns vary based on short-term interest rates. In recent years, with short-term rates historically low, money market rates have been low as well. Now that the Federal Reserve has started to raise rates, all interest rates, including those on short-term investments, likely will begin to increase.

2. Certificates of deposit

Certificates of deposit are bank deposits where you invest a fixed dollar amount for a specific period of time. Most banks offer CDs with terms ranging from three months to five years. In return, the bank pays you interest based on the length of the investment, with longer CDs typically paying a higher interest rate than shorter CDs. Banks usually pay interest on CDs annually or semiannually. A CD you buy through a federally insured bank is insured for up to $250,000 by the FDIC, which adds an element of safety to CD investing.

CDs are less liquid than other short-term investments. Most include a premature withdrawal penalty if you withdraw your money before the stated term ends. As a result, make sure you have another source of ready cash for emergencies so you don’t have to cash in a CD before maturity.

The interest you earn on a CD varies by institution. Research and compare your CD options and see where you can get the highest rate.

3. Checking and savings accounts

Some banks offer interest-bearing checking accounts, and most offer savings accounts that pay interest as well. Because you can access your money at any time without penalty, rates typically are low. But because the money is easy to access, many investors favor them for short-term investments, including for their cash reserves or emergency funds.

The bank where you open a CD, checking or savings account doesn’t even need to be in your neighborhood. For instance, online savings accounts often offer higher rates than traditional banks. You can search and compare banks across the country and choose the one that offers the highest interest rate and the best terms.

4. Short-term U.S. government securities

With government securities, you are essentially loaning the U.S. government money to carry out a variety of activities. In return, the government pays you interest for using your money. The U.S. Treasury offers a number of securities with maturities of five years or less. For example:

  • Treasury bills, which are sold at a discount and mature at full face value, have maturities ranging from a few days to one year.
  • Treasury notes are issued in two-, three-, five-, seven- and 10-year maturities and pay interest every six months.
  • Treasury inflation-protected securities (TIPS) are available in five-year maturities. Principal is adjusted based on changes in the consumer price index.
  • Floating rate notes have a two-year term, and interest payments rise and fall based on discount rates for 13-week Treasury bills.

All government securities can easily be sold through a broker and turned into cash within a few days.

5. Short-term corporate and municipal bonds

Like Treasury securities, where you are lending money to the federal government, with municipal securities, you are lending money to states and municipalities to fund their activities. Most municipal bonds have terms of 25 or 30 years when issued, but as they get closer to maturity, a broker can help you buy bonds on the secondary market that have five years or less until they mature.

These bonds are priced so the yield reflects current interest rates. While buying bonds adds an element of market risk, they can be a good place to park short-term cash and earn a fair rate of interest.

6. Peer-to-peer lending

Peer-to-peer lenders offer personal loans to consumers — without a bank. These platforms pair those seeking a loan with investors who are willing to loan them the cash.

In addition to borrowing at low rates, you can invest in making loans to others and earn short-term returns. While the risk of investing may be higher, the potential returns usually are higher than other short-term rates. The sponsoring companies take care of checking the credit of potential borrowers and other administrative tasks.

7. Repay high-interest debt

While this isn’t an “investment” in the traditional sense, it can be a good use of available cash. After you meet other short-term needs (like saving up an emergency fund), paying off high-interest credit card debt can yield a higher return than other short-term investments, such as CDs or money market funds.

Let’s say you have credit card balances totaling $10,000 and an interest rate of 22%. If you are trying to decide how to invest cash over the short term, why not pay off your credit card balance? Instead of paying 22% interest, you can pay off a significant debt and devote the monthly payments you would have sent to the credit card company to rebuilding your investment capital. In this way, you could “earn” 22% in the process.

Most short-term investors are concerned about earning the highest possible return with the greatest safety. A number of investments are available with varying returns and degrees of protection. Check each one carefully to determine which is best for you based on when you need the money you are investing.

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Source: https://www.magnifymoney.com/blog/investing/best-short-term-investments/

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