7 Best Short-Term Investment Options for Growing Your Money

Are you seeking ways to grow your money without committing to a long-term investment?  

Or

Do you want to increase your money quickly without locking it away for years?

Well, you're in luck because plenty of short-term investment opportunities can help you grow your money quickly.

Frequently, I receive inquiries about the best place to invest a modest sum of money accessible in less than a year from a bank account. The great news is that more options are now available to short-term investors. Short-term investments usually carry lower returns than long-term investments despite being less risky. Short-term investments can be beneficial for saving towards specific short-term goals, such as a down payment on a new vehicle or a house.

Investing for the long haul is the path to growing your returns and accumulating wealth over time. However, it's also essential to have some quick access to cash when needed, which is where short-term investments come into play. Regarding short-term investments, it's best to prioritize lower risk and higher liquidity over the possibility of massive gains. With the current state of the economy, including a bear market, high inflation, and the potential for a recession, many investors are wisely choosing to protect their principal by opting for short-term investments. Doing so, they can understand that their cash will be readily available when needed.

Trust me; short-term investments are smart for any savvy investor looking to safeguard their finances.

A savings or investing account with a short-term horizon provides a convenient location to store funds intended for goals expected to be achieved soon. Moreover, these accounts also generate some interest to offset the impact of inflation. Given the current higher interest rates, it would be wise to reconsider the potential benefits of these accounts.

This blog post will debate the 7 best short-term investments for your portfolio. You can achieve your financial objectives and the freedom you've always dreamed of with the right investment strategy.

Let's dive in and explore these investment options!

In this post, we will discover the following:

In this post, we will discover the following:

• What are Short-Term Investments?

• What Constitutes a Short-Term Investment?

• Are Short-Term Investments Risk-Free?

• What to Search for in a Short-Term Investment?

• 7 Best Short-Term Investments for Growing Your Money

High Yield Saving Accounts

Money Market Accounts (MMA)

Certificates of Deposit (CDs)

Municipal Bonds

Corporate Bonds

Peer-to-Peer Lending

Cash Management Accounts

• Best Way to Invest Money Short Term

What are Short-Term Investments?

Short-term investments are typically designed to be held for a relatively short period, usually less than a year. They are seen as a low-risk alternative to longer-term investments since they preserve capital while generating a small amount of income. Short-term investments are monetary instruments or assets that can be effortlessly converted to money, such as high-yield savings accounts, money market accounts, certificates of deposit, and treasury securities.

If you have a five-year or less savings goal, keeping your cash idle until then is unnecessary. There are several options to help your money grow, even within a limited time frame. Short-term investments allow your money to earn income while preserving its value. This could be useful when saving for a down payment on a house or a planned vacation. Therefore, short-term investments can be a great way to make your cash work for you, even in the short run.

What Constitutes a Short-Term Investment?

When investing, most people immediately think of stocks, bonds, 401(k)s, and IRAs. While these are great options for long-term investment goals like saving for college or funding retirement, they usually take years, or even decades, to mature before they can be cashed in.

But what about those who need their funds in the next few years?

That's where short-term investments come in. With a maturity period of just a few months to a few years, short-term investments offer the ability to cash in for their total value once they reach maturity. So short-term investing is the smart choice if you know you'll need funds within 3-5 years or sooner.

Are Short-Term Investments Risk-Free?

Short-term investment options are generally less risky than long-term ones but involve some risk. If your objective is to have access to your funds in a few months or years, it's understandable that you would want to minimize your risk exposure. However, even the top short-term investment choices entail some degree of risk. Nonetheless, you can mitigate your risk by selecting appropriate options that align with your circumstances. Like most investment types, the lower your risk tolerance, the lower your potential returns. It's essential to consider your individual risk tolerance and investment goals before making investment decisions.

What to Search for in a Short-Term Investment?

7 Best Short-Term Investments for Growing Your Money

When looking for a short-term investment, you should consider a few factors to guarantee your investment suits your needs:

Low Risk: If you need the money soon for another purpose, you can only stomach a little risk. For example, if you're house hunting and making recommendations, you shouldn't put your down payment in high-risk, speculative investments like cryptocurrencies.

Liquidity: How quickly will you be required to access your money? All deposit accounts let you access your cash instantly, although some charge a penalty for early withdrawal. And some investments are more straightforward to liquidate into cold, hard cash than others.

Stability: When you need to pull your cashback within the next 5 to 12 months, you can't wait out a stock market correction. That means you should avoid volatile investments subject to fast, violent swings in value.

Low Transaction Costs: The more frequently you move funds in and out of an investment, the faster transaction costs rise. For instance, rental properties come with enormous closing costs when you purchase and sell. The more you hold onto the investment, the less these costs influence your total returns, which is why people buy and maintain properties for years or decades.

Hedge Against Inflation: If you weren't anxious about losing cash to inflation, you'd leave your funds in your checking account. But ultimately, every dollar you leave in cash loses value each year. Investing money always involves some degree of threat, no matter how small. But when you fail to invest, you don't risk loss; you guarantee it.

Diversification: It's always a good idea to diversify your investments, even when looking for short-term options. Consider spreading your funds across different investment vehicles to help reduce risk.

7 Short-Term Investments for Growing Your Money

1. High-Yield Online Savings Accounts

   
   

Time Period: Indefinite

Return: around 0-2.50%

High-yield online savings accounts can be an excellent long-term investment option. They offer competitive interest rates ranging from 0-2.50% APY, which is higher than traditional savings accounts typically offer.

Here are a few reasons why a high-yield savings account ranks among the top short-term investment options:

Security: High-yield savings accounts are usually offered by reputable financial institutions and are FDIC-insured up to $250,000 per depositor. This means that savers' funds are protected, even if the financial institution fails.

High-Interest Rates: High-yield savings accounts typically offer higher interest rates than traditional ones, making them an attractive option for savers. However, the rate may be lower than other investment products, and the interest earned can still provide solid returns for money held for a short period.

Accessibility: High-yield savings accounts are highly accessible, allowing savers to withdraw funds quickly and easily without penalties. Interest also accrues daily, so savers earn interest every day when their money is on deposit.

Low Risk: High-yield savings accounts are a low-risk option for short-term investing. Compared to other income and assets, like mutual funds or stocks, the risk of losing capital is shallow with a high-yield savings account.

2. Money Market Accounts (MMA)

Time Period: Indefinite

Return: around 1-3%

Money market accounts are financial accounts that combine features of both checking and savings accounts. They allow check writing and withdrawals but may have a higher minimum balance requirement to ignore fees.

Money Market Accounts are the best small-term investment options due to their low risk, high liquidity, and competitive interest rates. These accounts offer a secure place to park your cash for a short period and a decent return on investment. Unlike other investment options, Money Market Accounts typically offer lower-risk investments such as short-term government bonds, CDs, and other low-risk securities. By following this approach, you can be confident that your funds are safeguarded and protected, even amidst fluctuations in the market.

In addition, Money Market Accounts offer high liquidity, which indicates that you can quickly and easily access your funds when needed without any penalty fees. It makes it an ideal option for short-term savings goals or emergency funds.

Money market accounts (MMA) are insured by the FDIC, providing security for investors.

New-opened money market accounts typically offer higher interest rates than traditional savings accounts. However, a limited number of withdrawals can be made within a particular time frame, making them less liquid than checking accounts but more fluid than certificates of deposit (CDs) while still offering competitive interest rates.

3. Certificates of Deposit (CDs)

Time Period: around three months to 5 years

Return: around 0.5-5%

CDs are a fantastic option for those looking for a short-term investment with high returns. By taking a step to invest in a certificate of deposit, you may sacrifice some flexibility when accessing your funds, but the higher return on investment makes up for it. CDs are deposit certificates, fixed-interest loans made to a bank for a predetermined period.

Once your CD matures, you'll receive your original investment plus the accumulated interest. While you can still withdraw your money from a CD at any time, it's important to note that doing so will come with an early withdrawal penalty, which differs depending on the bank.

The length of CDs can range from over 3 months to 5 years, and the more you're willing to invest, the higher your potential returns will be.

4. Municipal Bonds

Municipal Bonds can be a potential option for small-term investments, as they are issued by local, state, or government agencies to finance public projects such as schools, highways, or water treatment, some of the highest CD interest rates.

Investing in municipal bonds can be an excellent financial strategy for many reasons. Firstly, you pay no federal income taxes on the interest earned on these bonds. Additionally, you can avoid paying state and local taxes on interest in most states and cities.

There are 2 types of municipal bonds: revenue bonds and general obligation (GO) bonds. While revenue bonds are backed by a detailed revenue source, such as a hotel tax or toll road fees, GO bonds are not supported by a particular project.

Although default on a municipal bond is possible, it is relatively uncommon, especially compared to corporate bonds. However, the value of a municipal bond can fluctuate based on changes in interest rates. If the interest rates are high, the value of the bond decreases, and when they decline, the value of the bond increases. As a result, a short-term municipal bond investment may be less risky than a longer-term investment. It's always essential to research, understand the potential risks, and consult with a financial adviser before making investment decisions.

5. Corporate Bonds

Corporate bonds can also be a potential option for small-term investments. Companies issue these bonds to grow capital, and like municipal bonds, they offer investors a return on their investment as interest payments.

However, corporate bonds are not backed by a government entity, which means there is a higher risk of default than municipal bonds. In addition, the interest earned on corporate bonds is usually subject to federal taxes.

The threat associated with corporate bonds varies depending on the issuing company's creditworthiness. Companies with a higher credit rating are regarded less risky than those with a lower credit rating. It's imperative to research and understand the credibility of the issuing company before investing in a corporate bond.

Like government bonds, corporate bonds are loans with a fixed maturity date issued to corporations instead of governments. This may increase the risk but also open the potential for higher returns.

Additionally, you can buy and sell corporate bonds on the secondary market like other bonds. However, it's important to remember that if interest rates rise, the importance of existing lower-interest bonds may decrease on the secondary market.

For short-term investments in corporate bonds, it's best to stick with established and reputable blue-chip brands with household names. It may be tempting to take risks elsewhere, but investing in stable corporate bonds is the safest choice for short-term investments. Trustworthy brands with a proven track record can provide a steady return on investment and minimize the risk of losing money.

6. Peer-to-Peer Lending

Time Period: around three years to 5 years

Return: around 2.5-8%

Peer-to-peer lending is an unconventional way of loaning money to individuals and businesses, bypassing traditional banking and loan systems. This is facilitated through online platforms that link lenders with borrowers. This lending model has benefits for both parties involved. Borrowers can access more significant sums of money at reduced interest rates than other sources. Investors can access an alternative short-term investment option and earn competitive returns while contributing to funding someone else's goals. To invest in peer-to-peer lending companies, you purchase notes representing a portion of a loan.

However, P2P lending can also come with risks. Default rates on these loans can be higher than other loans, resulting in a loss of investment. In addition, P2P lending may not be as regulated and transparent as other investment options. You can underestimate risk by diversifying your portfolio and investing in multiple notes with different loans and borrowers.

Before investing, it's essential to thoroughly evaluate each investment platform, as they all have unique features. For those considering peer-to-peer loans, it's recommended to begin by researching Prosper and LendingClub.

7. Cash Management Account

Cash management accounts are an alternative option for investors seeking short-term savings. These types of accounts are usually provided by robo-advisors and online investment firms or discount brokers, and they can have various features that differentiate them from other kinds of accounts.

One of the significant advantages of cash management accounts is that they provide the flexibility of a checking account while offering a yield similar to a high-yield savings account. Some accounts may also allow investors to write checks, deposit checks using mobile devices, pay bills, transfer money, and set up an overdraft program. Additionally, some cash management accounts have the potential to offer a higher yield versus traditional checking and savings accounts, making them a more attractive short-term savings option.

One downside is that cash management accounts may have lower insurance coverage than traditional bank accounts. Investors should understand the coverage limits and how to protect their investments should an institution become insolvent or fail.

Cash management accounts can be an excellent small-term investment option for those seeking higher yields, flexibility, convenience, and security. However, as with any investment option, it's critical to understand the risks and thoroughly research to ensure the account aligns with your financial objectives.

Best Way to Invest Money Short Term

Determining the ideal method to invest money in the short term depends on certain factors. Consider your timeline and ascertain how long it will take for you to need your money back. If your savings objective or project is a few years away, options like peer-to-peer lending or CDs may be suitable.

If you have merely a few months to a year to invest, promotional bank offers or high-interest online savings may be a more viable choice. Typically, the extended the maturity of your investment, the higher the return.

Another critical aspect to consider is the level of risk you are comfortable with. Municipal bonds, for instance, are riskier than opening an online checking or savings account. As with maturity, the higher the risk, the greater your potential return. From this, it is evident that short-term investing is significantly different from investing in the long term. Regardless of your selected method, you should ensure that your money is easily accessible and not too risky for your short-term goals.

Bottom Line

As you plan to invest your money in the short term, it's essential to consider your risk tolerance carefully. Each person's financial requirements and risk tolerance are distinct. Remember that short-term doesn't always imply low return or less risk. Not risking the funds designated for your tenant's security deposit, your kid's college tuition, or any other payment with an upcoming deadline is essential. Aim for the highest possible investment return while keeping the immediately required funds safe.

It is critical to consider your financial goals and risk tolerance before making any investment decisions. By exploring the possibilities outlined in this article, such as high-yield savings accounts, CDs, and money market funds, you can find the correct short-term investment strategy to meet your needs. If needed, always research, consult a financial advisor, and remain disciplined in your investment approach to achieve your financial goals.