If you’re looking to invest money for the short term, you’re probably searching for a safe place to stash cash before you need to access it in the not-so-distant future. As a result, you’ll want to ensure you have that cash later when you need it, instead of squandering the money on a poor investment. So the most important thing investors should be looking for in a short-term investment is safety.
What to consider
But that safety comes at a cost. You likely won’t be able to earn as much in a short-term investment – an investment of a year or less – as you would in a long-term investment. So if you invest for the short term, you’ll be limited to certain types of investments and shouldn’t buy riskier kinds such as stocks and stock funds. Stocks can lose a lot of value in a year’s time, leaving you without the money you’ll need later. (But if you can invest for the long term, here’s how to buy stocks.)
Short-term investments do have a couple of advantages, however. They’re typically highly liquid, so you can get your money whenever you need it. Also, they tend to be lower risk than long-term investments, so you may have limited downside or even none at all.
Here are the best short-term investments in May:
- Savings accounts
- Short-term corporate bond funds
- Short-term US government bond funds
- Money market accounts
- Certificates of deposit
Overview: top short-term investments in 2019
Here are a few of the best short-term investments to consider that still offer you some return.
A savings account at a bank or credit union is a good alternative to holding cash in a checking account, which typically pays very little interest on your deposit. The bank will pay interest in a savings account on a regular basis.
Risk: Savings accounts are insured by the FDIC at banks and by the NCUA at credit unions, so you won’t lose money. There’s not really a risk to these accounts in the short term, though investors who hold their money over longer periods will have trouble keeping up with inflation.
Liquidity: Savings accounts are highly liquid, and you can add money to the account. Savings accounts typically only allow for up to six fee-free withdrawals or transfers per statement cycle, however. Of course, you’ll want to watch out for banks that charge fees for maintaining the account or accessing ATMs, so you can minimize those.
Corporate bonds are bonds issued by major corporations to fund their investments. They are typically considered safe and pay interest at regular intervals, perhaps quarterly or twice a year.
Bond funds are collections of these corporate bonds, and these collections consist of bonds from many different companies, usually across many industries and company sizes. This diversification means that a bad-performing bond won’t hurt the overall return very much. The bond fund will pay interest on a regular basis.
Risk: A short-term corporate bond fund is not insured by the government, so it can lose money. However, bonds tend to be quite safe, especially if you’re buying a broadly diversified collection of them. In addition, a short-term fund provides the least amount of risk exposure to changing interest rates, so rising or falling rates won’t affect the price of the fund too much.
Liquidity: A short-term corporate bond fund is highly liquid, and it can be bought and sold on any day that the stock market is open.
Government bonds are like corporate bonds except that they’re issued by the U.S. Federal Government and its agencies. Government bond funds purchase investments such as T-bills, T-bonds, T-notes and mortgage-backed securities from government-sponsored enterprises such as Fannie Mae and Freddie Mac. These bonds are considered low-risk.
Risk: While these bonds are not backed by the FDIC, the bonds are the government’s promises to repay money. Because they’re backed by the full faith and credit of the United States, these bonds are considered very safe.
In addition, a fund of short-term bonds means an investor takes on a low amount of interest rate risk. So rising or falling rates won’t affect the price of the fund’s bonds very much.
Liquidity: Government bonds are among the most widely traded assets on the exchanges, so government bond funds are highly liquid. They can be bought and sold on any day that the stock market is open.
Money market accounts are another kind of bank deposit, and they usually pay a higher interest rate than savings accounts, though they typically require a higher minimum investment, too.
Risk: Be sure to find a money market account that is FDIC-insured so that your account will be protected from losing money, with coverage up to $250,000 per depositor, per bank. Like a savings account, the major risk for a money market account occurs over time, because their low interest rates usually make it difficult for investors to keep up with inflation. In the short term, however, that’s not a significant concern.
Liquidity: Money market accounts are highly liquid, though federal laws do impose some restrictions on withdrawals. While you can write checks on the account, you’re limited to six withdrawals per month, though there are some exclusions to this rule such as ATM withdrawals.
You can find certificates of deposit, or CDs, at your bank, and they’ll generally offer a higher return than you could find in other bank products such as savings accounts and money market accounts.
CDs are time deposits, meaning when you open one, you’re agreeing to hold the money in the account for a specified period of time, ranging from periods of weeks up to many years, depending on the maturity you want. In exchange for the security of having this money in its vault, the bank will pay you a higher interest rate.
The bank pays interest on the CD regularly, and at the end of the CD’s term, the bank will return your principal plus the earned interest.
Risk: CDs are insured by the FDIC, so you won’t lose any money on them. The risks are limited for a short-term CD, but the biggest risk is that you may miss out on a better rate elsewhere while your money is tied up in the CD.
Liquidity: CDs are less liquid than other bank investments on this list. When you agree to the terms of the CD, you generally allow the bank to charge you a penalty for ending the CD early. So you want to be extra careful that you don’t tie up your money and then end up needing to access it before the term is over.
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Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.