If you're not exactly angling to play the stock market long term but still want to invest that extra cash you have, what are your options?
Lucky for you, there are plenty of good short-term investment options that can earn you decent returns. What are some of the best short term investments?
Still, first things first - what is a short-term investment, and how is it different from a regular or long-term investment?
What Is a Short-Term Investment?
A short-term investment, sometimes called a temporary investment or marketable security, is an investment that will yield its returns typically in less than five years (or in some cases within a year).
While some define short-term investments as those that cash out within three years (or sometimes even one year), the time span is typically around five years. With a shorter investment period, your goals will be different - for example, short-term investors may use the strategy to take advantage of rising interest rates over a short period. However, there are lots of options when it comes to a strategy with short-term investing.
If you've got a shorter time frame (between one and five years), you likely won't invest in a stock mutual fund or stock because you risk that a steady decline in prices (or a bear market) could wipe out any gains you might have been able to create.
Best Short-Term Investments
So, what are your options for short-term investing, and what are the best short-term investments to maximize profits and minimize risk?
1. Certificates of Deposit (CDs)
A Certificate of Deposit (or CD) is a great investment option for a short-term strategy.
Offered by banks, CDs are deposits that banks pay a higher interest rate because they are locked in for a longer period of time. CDs typically allow depositors to invest their cash in investments between three and five years, although some are even less (starting at one month) or can go up to 10 years. If you've got limited time, three years is a solid option, but remember - the longer the investment, the higher the yield, so you may want to opt for a five-year option. And while you may be able to receive monthly interest payments if you like, many investors choose to wait until their CDs have matured and cash in on the amassed interest at the end. And, as a plus, the FDIC will back your deposit up to $250,000 per person.
However, as a disclaimer, most CDs will penalize you for withdrawing your funds before maturity (usually in an amount equal to about three months of interest or so, but the fee varies depending on the bank), so you should really let your CD be until it matures if you want the full benefits of the investment.
The average returns for CDs range from around 0.5% to over 3%.
As of October 2019, American Express (AXP) has one of the better CD interest rates at 2.15% per year (APY) on their five-year CDs, although Goldman Sachs (GS) has comparable rates with a five-year CD at 2.45% APY for their online bank.
2. Treasury Securities
As a refresher, treasury securities are bonds issued by the U.S. Treasury and backed by the government's credit - and the range of treasury products is pretty extensive.
While you can invest in a variety of treasuries including treasury notes, treasury bills, floating-rate notes (FRNs) and more, a popular option for short term investments are treasury inflation-protected securities (TIPS).
TIPS are marketable securities indexed to inflation whose underlying value is based on the consumer price index (CPI). So, the underlying value rises with inflation. However, once the TIPS matures, you will get either the adjusted amount or the original investment - whichever is larger, so deflation won't hurt your investment.
Typically, TIPS has a return of between 0.5% and 2.5% (if you hold on to it for five years) semiannually. The idea behind the TIPS is that your end investment will be worth the amount of your original investment plus the interest you've accrued. And, your investment is protected from changes in inflation.
While you can invest in TIPS directly through the government (at TreasuryDirect.gov), most investors opt to invest in TIPS exchange-traded funds (ETFs) or mutual funds to avoid the interest being taxed - although you will need to open a brokerage account.
Additionally, treasury securities like bonds come at pretty much no risk, and their rates can range from 1.9% to 2.4%.
3. Rewards Checking Accounts
If it was 2008, you'd be getting pretty great APYs on rewards checking accounts (even upwards of 10% for some banks). But even though they've declined a bit in popularity in recent years, rewards checking accounts are still a good way to earn a bit in a short-term capacity.
To make the most of your rewards checking account, you will need to use your cash-back credit card to reap the full benefits (so using your debit card 10 to 15 times a month might make you miss out on your rewards).
4. Bond Funds
If you've got a shorter timeline (around two years or so), bond funds could be a great option.
Managed by professional financial advisers, bond funds are often a higher yield (although sometimes riskier) investment than money markets. So, if you're looking for a high-yield short term investment, bonds may just be the right fit.
With bond funds, you can get the benefits of portfolio managers and yields that range upward of over 3%. Still, make sure to pick a bond fund with low fees.
As of 2018, some of the better funds include Vanguard (VFSTX) , which has a fund with a minimum of $3,000, an expense ratio of about 0.20% and a current yield of about 3.12%. Additionally, iShares Barclays Treasury bond fund (SHY) for one to three years has a current yield of around 2.5%.
Unfortunately due to the nature of the market, your investment is not guaranteed. Still, there are no penalties for withdrawing your money early (which could be a huge plus for some investors).
5. Municipal Bonds
Municipal bonds are a bit riskier than TIPS or other kinds of bonds, but there's pretty high yield potential.
Municipal bonds are issued by local, state or government agencies (not the federal government.) As a plus, municipal bonds are often exempt from interest tax.
There is potential to get a pretty high return (upward of 4%) on municipal bonds, but the major downside is that if the interest rates rise, the value of the municipal bond goes down - sometimes called the "interest rate risk."
Still, if you hold on to your bond until its maturity, you can get your whole investment plus the interest back.
You can get in on municipal bonds through brokerage accounts like TD Ameritrade (AMTD) .
6. Peer-to-Peer Lending
Almost like getting a credit card, borrowers are rated by their creditworthiness, which can help minimize risk when lending to someone with a higher degree of creditworthiness.
While the interest will vary depending on the borrower's creditworthiness (for Lending Club, those who rank as "A" are 4.89%, while Prosper rates "AA" with estimated returns of 4.15%), they typically range upwards of 4%.
For most, terms are about three years and typically require a minimum of $25.
7. Money Market Accounts
These FDIC-backed accounts allow investors to invest their money, earn a higher interest rate than a savings account, and protect their money in the meantime.
However, money market mutual funds are not FDIC-insured, so it is important to note the difference. Money market accounts act in a similar fashion to regular accounts in that you can often write checks or use a debit card for your account (although you may be limited in how many times you can use it).
Still, most money market accounts require a minimum deposit, so be sure do to your research if you have limited funds to work with.
Sallie Mae Bank Money Market Account (SLM) rate is about 1.85% APY for reference, as of October 2019.
8. Roth IRA
While perhaps not a traditional investment vehicle, Roth IRAs are actually similar to many of the other short-term investment strategies in that you can withdraw funds at any point without penalty.
Because the Roth IRA is post-tax (meaning your contributions are taxed before they're invested), you can withdraw them without having to pay taxes or penalties.
Additionally, Roth IRAs can be good short-term investment options because you can often invest in higher return options like ETFs and mutual funds.
9. Paying Off High-Interest Debt
This is a great option for a quick, high return on investment (read: double-digit returns).
Paying off high-interest debt like credit cards is a smart choice because you can get a great return while improving your financial situation - and, guarantees a return. For example, paying off a credit card with a 15% interest rate on $10,000 is a great option to essentially get 15% on $10,000 - and can even allow you to carry your high-interest balance onto a 0% APR balance transfer card like Chase Slate (JPM) or Discover it.
In general, paying off high-interest debt will get you great returns, so it's definitely worth looking into.
10. Online Savings Accounts
Albeit a bit of a more conservative option, online savings accounts can still get you a better interest rate than many traditional banks. If you opt for a high-interest savings account, you can typically get rates of between 1% to 2% per year. Additionally, the FDIC backs $250,000 per person, making it a safer option.
Because there are no limits on withdrawals, liquidity is higher for online savings accounts and maybe a draw for investors.
Discover and Ally (ALLY) has good rates (at around 2%).
11. Promotional Deals
Despite being a somewhat unorthodox short term investment strategy, taking advantage of promotional and cashback deals can help you earn money fast.
However, this twist is that you can only get earnings when you spend money (as opposed to getting returns on investing money).
For example, the Capital One Venture card (COF) offers 50,000 travel miles when you spend $3,000 in the first three months - translating to about $500. Additionally, other cards like Chase Sapphire Preferred card let you earn 50,000 points ($500) when you spend $4,000 in the first three months (plus, the $95 annual fee is waived for the first year) - so spending money on things you normally buy can actually give you money back.
Why Make Short-Term Investments?
Because of their time frame, short term investments are often seen as safer than long term investments, especially on the stock market. While long-term investment positions (especially on the stock market) are subject to market fluctuations, bull and bear markets (which may erase gains or yields) and other risks, short-term investments are often thought to be safer and can still produce decent profits for the investor.
Of course, short-term volatility is always possible, and short-term investments - like with any investments - should be seen as inherently risky endeavors that have their positives and negatives as any other investment would.
The Bottom Line
Just because you have a limited time frame in which you'd like to invest doesn't mean you can't get decent returns. Be creative and research your options for unique ways to earn money in the short term.