It’s not the most exciting moment when you look at your savings account and see it slowly increasing at a .01% interest rate. But if you need the money relatively soon, you might feel hesitant with placing your money in long-term investments. Short-term investments allow you get a higher interest rate without having to worry about investing money in places with long term return.
Here are some possible options for you:
1. Pay Off Debt
Before you look into any form of investment options, one of the best investment options for you is to pay off any credit card debt that you may have. The average credit card interest rate is 12.77%, which is a much higher number than what you’d earn with investments. Consider money that you are paying towards debt as investing in your future financial health.
2. High-Yield Savings Accounts
High-yield savings accounts are great places for your money if you need it in 2 years or less. For example, if you are trying to save up for a new car or a down payment on a new home. You can often find banks that offer 2% APR on these accounts (as opposed to the .10% return you’d find on a common savings account). The money from these accounts can be easily withdrawn and is insured by the FDIC for up to $250,000.
3. Short-Term Bond Funds
With a short-term bond, you lend money to a company or government. The company or government then pays you back with interest. One major risk with these funds is that they may default. You can reduce your risk here by purchasing a bond issued by the U.S. government. The interest rate on these bonds is anywhere from .5% to 2%. Since these bonds normally mature in one to three years, they are a great option if you know you want to take out money in three years or less.
4. Money Market Funds
Money market funds are mutual funds purchased to cover the debt of the U.S. government, municipalities, or organizations. The interest that you earn comes in the form of the interest payments made by the borrower. The higher the interest rate, normally the riskier it is. While these are relatively low-risk overall, you want to keep in mind that they aren’t FDIC insured.
5. Peer-to-Peer Loans
Another option for short term investing is a peer-to-peer loan. How this works is companies such as Prosper and Lending Club allow you to lend money to individuals to help them cover expenses such as medical bills, home renovations, etc. This could potentially give you a return of 5% or more.
But heads up, there is some risk here since you are depending on an individual to pay you back. The peer-to-peer loan company does credit check the individual, and you can select loans for individuals with higher credit. You could also reduce your risk by loaning smaller amounts to multiple individuals, rather than one lump some to one individual.
Peer-to-peer loans is a great option if you want to stash your money somewhere to accrue interest for 3 to 5 years.
A CD (or certificate of deposit) is another option for investing your money. This is a savings account with a fixed interest rate (generally 0.5-3%). This differs from a standard savings account because you cannot deposit and withdraw money as easily. Instead, you place the money in a CD account for a specific period of time and then withdraw it once it matures (standard maturation rate is between 3 months and 5 years). Since these accounts are federally-insured, they are a relatively low-risk way to invest your money.
Before you get started with investing your money in one or some of these investment options. Ask yourself a few important questions: How much money do I want to place in short-term investments? When do I think I would need this money? And how much risk am I willing to take? To lessen the risk, you may want to distribute your money across multiple options, if possible.
1. https://www.nerdwallet.com/blog/investing/where-to-put-short-term-savings/ 2. https://www.thebalance.com/short-term-bonds-funds-vs-money-market-funds-416961 3. https://www.creditdonkey.com/short-term-investments.html 4. https://www.goodfinancialcents.com/best-short-term-investments-right-now-for-your-money/ 5. https://www.dollarsprout.com/best-short-term-investments/