Who wouldn’t want to make a quick buck in some form of investment? That’s basically what short-term investment is.
A short-term investment is an investment that is designed to give you returns in less than five years. The short timeframe makes short-term investments typically safer compared to long-term investments. There are numerous short-term investment options.
However, finding the best short-term investment can be challenging, especially if you are new in the world of investing. So, if you have no idea where to put your money and get a good return in the short term, here is a list of some of the best short-term investments to inspire you.
Online Savings Account
If you feel dissatisfied with the meager interest rates traditional banks in your area offer on savings accounts, you can consider switching to an online bank.
Traditional banks frequently offer as little as 0.01 percent interest on savings accounts. With an online savings account, you can get an interest rate higher than 2 percent.
One of the advantages of online savings accounts is that you can withdraw your funds whenever you want. Moreover, the FDIC covers your investment. You also don’t have to pay any fees in most cases, though some banks do require a minimum balance.
Certificates of Deposit
A certificate of deposit (CD) is another excellent short-term investment option.
They allow you to deposit your money in investments ranging from three to five years and then earn a predetermined interest rate. There are also some CDs that have a maturity period of a little as one month.
If you want to get the best return from a CD, you should go for the longest investment period, which is usually five years.
You also have the option of collecting monthly interest payments. However, it’s advisable to wait for your CD to mature before cashing in your accumulated interest.
It’s also worth noting that most CDs will penalize you if you remove your funds before your CD matures. This penalty is another major reason to wait until out the full payout. Currently, the return for CDs is generally between 0.5 and 3 percent.
Money Market Account
Money market accounts function in the same way as CDs. The main difference between money market and a CD is that you can access your funds at any time when you invest in the money market. In fact, money market accounts often provide investors with deposit slips, checks, and ATM cards.
While CDs are based on the length of time you invest your money, money market accounts are based on the amount of money you have in your account. Moreover, this type of investment has virtually no risk, and can typically deliver a higher rate of return.
With peer-to-peer lending, you give someone money in the hopes that they will pay you back with interest.
Online Peer-to-peer, or P2P, platforms connect you to qualified borrowers, and you act as a bank, offering loans to these borrowers. Once you provide the loan, you’ll generally receive a monthly income in the form of loan repayment plus interest.
Lending Club is one of the most popular P2P platforms. One great thing about this platform is that it screens the borrowers and only accepts ones that are more likely to repay their loans.
This vetting process helps to minimize the risk for default and the likelihood of losing your money. You can start with lending small amounts of money and increase the amount gradually as you gain more confidence in the P2P platform.
Some P2P platforms allow you to lend as much as $10,000.
Short-Term Bond Funds
Short-term bond funds are a type of bonds that have maturity terms of less than one year. FThis makes these types of investments less prone to stock market events and increases in interest rates. Short-term bonds are available in three primary categories:
- Government-Issued Bonds
- Municipal Bonds
- Corporate Bonds
The U.S. government backs Government-issued bonds, and so they have a lower risk. Companies and local governments back municipal bonds and corporate bonds, respectively. This extra assurance makes them somewhat riskier than government bonds.
To invest in short-term bonds, you’ll need to open a brokerage account. There are numerous brokerage firms through which you can invest in bonds. Be sure you choose the right firm for your specific investment needs.
Treasury securities are a type of bond issued by the U.S. Treasury and backed by the government’s credit. There are several different types of treasury securities, including the following:
- Treasury bills
- Treasury notes
- Floating rate notes (FRNs)
- Treasury Inflation-Protected Securities (TIPs)
TIPs are one of the most popular short-term investment options today.
These are marketable securities that are designed to protect your investment against inflation. When a TIP matures, you’ll receive either your original principal investment or an adjusted amount based on inflation, whichever is larger.
That means deflation won’t affect your investment. TIPs usually have a return of between 0.5 and 2.5 percent every six months. You can invest in TIPs directly through the government.
However, the best approach is investing in TIPs exchange-traded funds (ETFs) or mutual funds. In this way, you’ll avoid paying tax on your interest earnings. You’ll need to open a brokerage account if you opt for this approach.
Additionally, treasury securities such as bonds have virtually no risk. They usually have a return of between 1.9 and 2.4 percent.
Selling Covered Calls
Selling covered calls on stocks that you already own is an interesting short-term investment option. So, how does this type of investment work?
When an investor sells a call on a stock they own, another investor will pay a premium for the right to purchase the stock at a specified price. If the stock fails to reach the specified price by expiration date, you get to keep the premium plus your stock.
If the stock reaches the specified price, however, you’ll have to sell it at that price. Selling covered calls in a flat or declining market is a wise investment decision, because there’s a high chance of making extra without the risk that you would otherwise have when selling your shares.
To engage in this kind of investment, you’ll need a discount brokerage account that supports it.
Online Checking Accounts
An online checking account can also work as a short-term investment option.
An online checking account offers virtually the same benefits as an online savings account. The significant difference between these two accounts is that a checking account has more liquidity since you can make withdrawals as often as you want.
The major setback of online checking accounts is that interest rates are exceptionally low. Fortunately, you are guaranteed returns. You also don’t have to worry about losing your principal as it’s FDIC insured up to $250,000.
Another great thing about this type of investment is that it’s virtually hassle-free. You can easily and quickly open an online checking account from the comfort of your home. Some online banks also offer sign-up bonuses if you deposit a certain amount within a set timeframe.
Floating Rate Funds
While floating rate funds aren’t popular among investors, they can be a wise short-term investment.
These are ETFs and mutual funds that focus on investing in bonds and other debts with variable interest rates. They usually invest in bank-issued or company-issued short-term debt, ordinarily between 60 and 90 days.
Floating rate funds give you the opportunity to capitalize on rising interest rates since they regularly roll over portfolio bonds every few months. Additionally, floating rate funds typically pay decent dividends, thanks to the underlying portfolio bonds.
You should realize, however, that these types of investments are risky. Most of them invest through leverage, meaning investing in them requires taking on debt. It’s common for floating-rate funds to invest in higher-risk bonds with the aim of getting higher returns as a result.
Floating rate fund investments require a brokerage. There are numerous floating rate funds available on the market today, including the following:
- Pacific Asset Enhanced Floating Rate ETF (FLRT)
- iShares Floating Rate Bond ETF (FLOT)
- Barclay’s Capital Investment Grade Floating Rate ETF (FLRN)
- VanEck Vectors Floating Rate ETF (FLTR)
Pay Down Your Credit Card Debt
Paying off your debts can sometimes serve your short-term investment needs.
If you clear your credit card debt, for example, you’ll see a return on your investment immediately. Paying your credit card debt down—or even off— is an excellent way to use some money to cater to your short-term needs.
Most credit card debts attract an interest rate of at least 12 percent. You can hardly find an investment that can match the return gained by no longer paying interest on your credit card debt. Therefore, it advisable to prioritize paying off your card debt as soon as possible.
If you are unable to pay your credit card debt due to financial constraints, you should find a practical strategy that will help you get out of debt. Some of the most effective strategies are debt avalanche and debt snowball.
Then you need an effective tool to help you create a budget that allows you to avoid future debt accumulation. You’ll not only get out of debt but get your finances in order in the process.
A Roth investment retirement account (IRA) is another option that can help you meet your short-term investment needs. One significant advantage of Roth IRAs is that you can access your funds whenever you want without worrying about penalties.
Roth IRAs are post-tax investments. That means your funds are taxed before they are invested.
The funds aren’t subject to tax when withdrawn. Another great reason Roth IRA can be an excellent short-term investment option is that you are allowed to invest in high-return opportunities such as mutual funds and ETFs.
Brokered certificates of deposits, or Brokered CDs, have some slight differences when compared to regular CDs. These types of CDs are purchased through a brokerage firm, and hence the name “brokered.” Nonetheless, they must be initiated by a bank.
That means brokered CDs come with the same features as regular CDs, such as being FDIC insured. One of the best things about brokered CDs is that the brokerage firm will sell you CDs from several different banks.
You may end up getting impressive returns from little-known banks you may not have even know existed. There are two main types of brokered CDs you can invest in:
- Callable brokered CDs
- Non-callable brokered CDs
With a callable brokered CD, the issuing bank can call the CD and purchase it back. Callable CDs frequently come with higher interest rates since you are taking on more risk. Namely, there’s the possibility of the bank calling the CD if they can get lower interest rates.
It’s also worth noting that the minimum deposit amount for brokered CDs usually is higher compared to those of regular CDs.
Tax Lien Certificate Auctions
Property owners are sometimes unable to pay a county or local tax. When that happens, the government will put a tax lien on the property and then auction the lien to recover its money.
You can purchase such tax liens at auction, pay the government, and take possession of the lien yourself.
Tax lien interest rates are set by the state law where they are established. If the redemption period elapses before the property owner pays the lien off, you can foreclose on the property. Liens are one of the safest short-term investment options since the property serves as collateral.
However, you can still run into some risks, especially during the lien purchase process. This is typically caused by insufficient information. You may go to an auction only to find that all the liens you’re interested in are unavailable because someone paid them off.
There’s also the possibility of winning a lien where property has much less value than you expected. Finding the right lien can be a daunting process.
You need to invest a lot of time in researching property, attending auctions, following liens, and much more. Otherwise, you may end up with a worthless lien.
Cash Back Deals
This may not pass as a short-term investment strategy, but capitalizing on cashback deals is an excellent way to make some quick money. Unlike other investments where you get a return on investing funds, cash back deals require you to spend money to get a return.
For example, the Chase Sapphire Preferred card will reward you with 50,000 points if you spend $4,000 in the first three months. You’ll get $500 when you redeem these points. On top of that, you don’t have to pay the $95 annual fee.
That means you can get some money back when you spend money on stuff you already buy such as groceries and utility bills.
Best Short Term Investments Bottom Line
There are numerous short-investment options available. Deciding how to invest will depend on individual preference and investment goals. Some investments are better than others because they have a lower risk while delivering a good return.
You should realize, however, that there’s no such thing as a risk-risk free investment. Every investment has some amount of risk, and so you need to do your homework before you make a short-term investment decision.