Short term investments are a low-risk, quick-return way to invest your money. If you’re trying to find an opportunity for good returns without putting too much money at risk, short term investing could be your solution. Short term investing can refer to anything that you invest in, and getting your money back within a short amount of time. they are low-risk but feature very low interest rates or profit margins. Short term investments are great for people who are looking for a way to set money aside somewhere it will gather a little interest.
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What We Will Cover
- What is a short term investment?
- Things to consider before investing short term
- The best short term investments
- Different kinds of short term investments
What Are Short Term Investments?
Short term investments are for money you want to invest, but will need back at a specific time. For example, you may plan to access your money again when you plan on buying a car or putting a down payment on a house. The benefit to these investments is security in knowing you’ll get it back, but the drawback is that you may sacrifice the opportunity for a bigger return from a different investment strategy. The timeline for short term investments is typically under 3 years.
The main goal for these investments for both the company and for investors is to protect capital while also generating a return. Companies with a stronger cash advantage will have a short term investment account. In turn, the company can then turn around and invest excess cash into stocks and bonds in order to earn a higher interest rate than that of a normal savings account.
This is attractive to businesses because it leads to an asset on the balance sheet of an investor. They invest a large part of their excess funds in order to make a small return and have the ability to access it on short notice.
There are various different options, with a lot of different timeframes, interest rates, and risk factors. The ones we will go over are:
- Savings accounts
- Cash Management accounts
- Short term bond funds
- Money market mutual funds
- Bank certificates of deposit
- Peer to peer loans
Things to Consider
The security you gain will definitely come at a price. The chances of having a more lucrative investment are a lot slimmer. Higher-stakes investments that could generate larger returns will not be the type of investments you will make. An example would be higher-paying stock funds which will not be available at the amount you will invest.
There are many positive aspects of short term investing. These investments are typically more fluid, meaning they’re a lot more flexible in allowing you to get your money back at any time. The risk is also much lower than long-term investing. It is like someone else holding your money for you until you’re ready to take it back.
Best Short Term Investing Options
If you’re looking to invest for less than two years, it would be good to invest in online savings, or cash management accounts. The possible interest rate would be around 1.5% or more with low risk. Granted, this is a relatively low reward, yet it is better than saving in a typical bank account. These options are great if you’re really looking to have a quick turnaround. However, if you are looking to make more money these will probably not really be for you.
For investments for the duration of two to three years, short term bond funds or money market mutual funds are best. The potential interest rate is 2% or more depending on the risk. The risk is a little higher than the options previously listed, but it could be lower if you choose government bond funds. The lower the risk, the lower the return, and higher risks yield higher returns.
To invest for three to five years, bank certificates of deposit (CDs), or peer to peer loans are the best way to invest. CDs are offered by banks, and most of the time they offer a higher interest rate because with CDs money locked up for a set period of time. Peer to peer loans are investments that depend on borrowers being matched with lenders. The interest rate may be 2.5% for CDs and 5% for the peer to peer. The risk is low for CDs and moderate for peer to peer loans. The return could be moderate to high, depending on the duration of the CD. The longer the CD, the higher the return. With peer to peer loans, you’ll be helping fund borrowers.
A short-term bond fund offers the opportunity for a better payout depending on the risk factor of the kind of bond you’re willing to invest in. A bond is a loan that is paid back at a fixed interest rate by a company or the government. This is safer than some higher payout options, like stocks, but the risk is still greater than those lower interest rate investments. When the interest rate for your bond goes up, typically the value goes down. Bond funds that typically own bonds issued by the U.S. government and municipal bonds issued by states and cities are safer routes to go for investing in short term bond funds.
Peer to peer loans are one of the riskier short term investments. They connect those who are willing to loan cash to those in need of the money for things like medical expenses or even to buy a car. You can choose to loan only to those in a higher credit tier to lower your risk. Choosing that route will give you less opportunity for higher interest rates, but the risk will be significantly lower, and the return will still be higher than that of other investments. Another way to lower the risk would be to spread your investable money across many different borrowers. These investments require a minimum loan of $25 and need to be arranged for a term of a minimum of three years.
A very low-risk investment is simply putting your money into a savings account. This kind of bank account, unlike a checking account, offers a small interest rate. There is no risk in this kind of investment, but there is not much return either.
Another short term investment option is a cash management account. This kind of account gives you the ability to invest in a variety of short term investments. It allows you the flexibility to not have to make one singular choice. The risk is relatively low in these kinds of investments.
Treasuries are another type of short term investment. There are 3 kinds: T-Bills, T-Bonds, and T-Notes. They are backed by the AAA credit rating of the federal government. There is low risk in these because they are guaranteed by the government to be paid back.
If you do have more time to invest, somewhere closer to five years, you may want to invest in stocks. Stocks offer a lot more opportunities and higher interest rates. However, there are a lot more ups and downs that go with stocks, and you just have to be willing to ride them out. You must have enough time to wait for an upward swing in the profits.
To conclude, short term investments are great for those looking to invest a small sum for a short period of time. You only need a small amount of money, a small amount of time, and no expectations of a really large return in order to invest in short term investments. There are many options with various interest rates, risk factors, and timeframes. If you have money you need to put aside safely, and you want the added bonus of having a small amount of money added to your already-existing cash, short term investing is really the way to go.