Last Updated: January 12, 2022
Financial advisors always seem to be talking about investing in the long term. But what about investing in the short term? Not many are aware that there are many ways you can invest in the short term as well. This article addresses the best way to invest money short term and helps you choose the best suitable investment option.
What Is Short-Term Investment?
Short-term investment refers to investments that have high liquidity or can be easily converted into cash. The average holding time of these investments is between three to five years. But some also hold these assets only for a few months.
Short-term investing is quite different from regular, long-term investing, where investors tend to hold on to assets for several years to yield the maximum benefit. Long-term investments typically have low liquidity and are suitable for those who want stability and safety of investments.
As an ideal investor, you should invest both in the short term and in the long term, leading to a diversified investment portfolio and a return both in the short and long term.
NOTE: Many also choose peer-to-peer lending as a form of investment, where the borrower pays monthly interest on the amount taken as a loan.
Best Way to Invest Money Short Term
Consider the following eight best short-term investments.
- Savings Accounts: Depositing your money in a savings account is one of the quickest ways of growing money while having total control of the liquidity. You deposit your money with a bank (or bank alternative) and earn interest on the principal amount. The interest rates vary from one institution to another.
You should choose a high-yield savings account—such as IRA savings accounts—for maximum benefits. These accounts are also highly safe if you’re looking for a low-risk investment.
- Money Market Accounts: Money market accounts are one of the best short-term investments. They are interest-bearing accounts that work similarly to a savings account. The liquidity is a bit low because money market accounts tend to put restrictions on withdrawals. But these investments are quite safe and offer higher interest rates compared to savings accounts.
- Cash Management Accounts: Cash management accounts manage your cash and investments, performing like a parent account from which you can buy and trade short-term securities and other short-term investments. You can also withdraw money, as cash management accounts offer high liquidity. In addition, the risk exposure is very low because you have total control over the money and can withdraw the amount anytime.
- Certificates of Deposits (CD): These types of bank investments are deposits you make with your bank for a fixed period. The bank pays interest on the deposits, and once the period expires, you can have the principal amount along with the earned interest, which means that they’re not very liquid. Many also charge a penalty or deposit coverage if you try to access the deposit before time.
CDs are insured by the Federal Deposit Insurance Corporation (FDIC), making them one of the best short-term investments for those who want the minimal risk. The only risk is that the interest rates may be lower compared to other banks.
- Treasurys: There are three types of treasuries: T-bonds, T-bills, and T-notes—all of which come with a maturity date. And the longer you hold them, the more interest you can earn. Although they’re not FDIC-insured, they have a very low risk because the government promises the payment. They also offer high liquidity because they’re bought and sold daily. You can even sell them before maturity.
- Short-term Corporate Bond Funds: Short-term investment options also include short-term corporate bonds issued by large corporations to fund their investment. They are safe and give investment returns in the form of interest. You can also earn returns via bond trading in the stock market. Corporate bonds are typically considered safe if you have a diversified portfolio.
- Short-term US Government Bond Funds: Government bonds work similarly to corporate bonds. The only difference is that they’re issued by the government and are highly secure and liquid. You can earn interest or sell them when the bond values increase.
- Money Market Mutual Funds: Money market mutual funds employ short-term investment strategies by investing in a combination of treasuries, government bonds, municipal bonds, individual bonds, debt funds, etc. They are typically safe because they create diversified portfolios, and the overall return is usually high, even if one investment is poorly performing. Money market mutual funds are also highly liquid, and you can even earn profit through the traded assets.
Does Short–Term Investing Pay Off?
Investment in the short term is suitable for those who prefer conservative investments. These investments offer high liquidity, so your money doesn’t get locked away for long periods. They’re also backed by major financial institutions, such as the FDIC, a credit union, or the National Credit Union Administration (NCUA). They are also less risky because you can withdraw your funds if you perceive a loss. And they’re suitable if you’re investing for short-term goals, such as purchasing a car or electronics or realizing a short-term savings goal.
Despite all the advantages, the short-term investment’s annual percentage yield (APY) is relatively low. The tax benefits are also low compared to long-term investments.
As an ideal investor, you should invest for the short and long term. The former will provide you with growing money while maintaining liquidity, while the latter will help you achieve your long-term goals. You should invest in safe short-term investments if your income is low and require a return within a few months or a few years.
Investment in the short term—typically done for less than five years—offers high liquidity and is less risky compared to other types of investments. Some examples of short-term investments include savings, cash management, and money market accounts. You can also invest in government or corporate bonds, which only requires a small amount of money and can help you grow your money in the short term.
What is the best investment for 6 months?
If you only want to invest for six months, you can invest in a savings or cash management account.
You can purchase various CDs, government and corporate bonds, or treasuries. Investing in money market mutual funds is also an excellent option.
The best way to invest money short term includes savings, cash management, and money market accounts. You can also purchase government bonds or invest in money market mutual funds.