Short-term investments are generally defined as investments that pay off in less than five years (sometimes even less time, perhaps within a year). Whereas long-term investments are generally made with the goal of building overall wealth and preparing for retirement, short-term investments typically are made to build wealth quickly. Often, an investor wants to prepare for a specific goal, such as paying for college or buying a new home. Most successful portfolios will contain a mix of short-term and long-term investments. With that in mind, here are some of the best short-term investment options for investors who want returns sooner than later.
A financial advisor can help you decide on short-term investment options for your financial plan.
Certificates of Deposit
A certificate of deposit (CD) is one of the safest short-term investments you can choose. CDs are offered by most major banks. You give a sum of money to the bank for a predetermined length of time. At the end of that time period, you get back your principal plus interest at a predetermined rate. The longer the term of the CD, the higher the interest rate.
You could get a CD for a truly short period of time, sometimes as brief as one month. Or, you could select a CD with a slightly longer term, like three or five years. If you’re later looking for a longer-term investment, you can also get a CD for up to 10 years.
CDs are FDIC-insured, which significantly minimizes any risk involved. They have lower returns than some other investments though. This makes them a good choice for investors who want to generate a small amount of wealth with very little risk required.
U.S. Treasury Notes
Buying notes from the United States government is another short-term investment option that is low-risk. Notes have a relatively low return rate, generally earning no more than 2.50% interest every six months. On the upside, they are very low-risk. As long as you have faith that the United States government won’t collapse, you aren’t taking any big risks.
With notes, you are basically loaning money to the federal government. An investor purchases the note and earns interest payments every six months untila predetermined maturity date. You can then cash out the note. Maturity dates can be two, three, five, seven or 10 years from the date of purchase. You can buy notes directly or invest in a mutual fund or exchange-traded fund (ETF) that invests in notes.
There are manychecking and savings accounts that offer rewards based on how often you use them or how much cash you store in them.
If you find an account that gives you a good return, it’s a solid short-term investment from which you can passively earn wealth. The return is likely to be fairly small, so these aren’t likely to get you to your goal by themselves. However, they are a good way to make sure all of your money is working for you, even the money that isn’t actively invested.
Money Market Accounts
Money market accounts are similar to checking and savings accounts, but they often have a higher interest rate. You can generally debit or write a check against them. There may be a limit to these actions, though.
Money market accounts are a good way to earning interest without needing to think too much about your actual investing decisions. The risk involved is very low, as the FDIC insures money market accounts (but not money market mutual funds).
The potential return isn’t high with money market accounts, but it is generally better than if you’d let your money sit in a normal checking account. Thus, it makes sense for investors who simply want to earn some passive income but not necessarily those who want to actively grow their portfolio.
Cash Back Credit Cards
There are a ton of credit cards out there that give cash-back rewards for customers’ spending. Some of them focus on types of spending like dining or travel, while others give more general cash back.
This is, again, a type of passive investment where you are earning money simply by making purchases you’d already make. It isn’t going to buy you a new house, but you could use the cash back you get to fund a vacation or another big purchase.
It’s risky to invest in stocks for the short term, but there is the potential to make a big return. If you (or a financial advisor you’ve hired to help you invest) sees a stock that is due for a big bump in price quickly, you can buy it and then sell it as soon as the price goes up to make a quick return.
This comes with a lot of risk. You could be wrong about the stock and instead see a big dip in price. This is always a risk when investing in stocks, but it is even higher when you’re counting on a quick turnaround. Make sure you can take the potential loss before making a short-term stock investment.
Short-term investments are a good way to generate wealth in a condensed time frame. They are sometimes riskier than long-term investments, though some options are considerably less risky than others. However, the lower risk options tend to have a much lower rate of return. Still, all of the above short-term investment options can help you to build your portfolio and can prove especially useful if you are looking to raise funds quickly for a specific purpose, like buying a new home or paying for a honeymoon. Make sure to consider both risk and reward when making decisions about short-term investments.
- Short-term investing, like all types of investing, can be confusing. A financial advisor can help you create a financial plan for your investment needs.SmartAsset’s free toolmatches you with up to three vetted financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
- Asset allocation is an important part of all investing, no matter the time horizon. Use SmartAsset’s free asset allocation calculator to figure out how you should allot your money based on your personal financial situation.
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As a seasoned financial expert with years of hands-on experience in the investment realm, I've successfully navigated the intricacies of both short-term and long-term investment strategies. My deep understanding of financial markets, risk management, and wealth-building has equipped me with the knowledge to guide investors toward optimal decisions. Now, let's delve into the concepts discussed in the provided article:
Short-Term Investments vs. Long-Term Investments:
- Short-term investments typically pay off in less than five years, providing quick returns.
- Long-term investments are geared towards building overall wealth and preparing for retirement.
- Successful portfolios often include a mix of short-term and long-term investments for balanced risk and return.
Financial Advisor's Role:
- Financial advisors play a crucial role in helping investors choose short-term investment options aligned with their financial plans.
Certificates of Deposit (CDs):
- CDs are safe short-term investments offered by banks with predetermined terms.
- FDIC-insured, offering low risk but lower returns.
- Various terms available, ranging from one month to 10 years.
U.S. Treasury Notes:
- Low-risk short-term investment options issued by the U.S. government.
- Maturity dates can be two, three, five, seven, or 10 years.
- Can be purchased directly or through mutual funds or ETFs.
- Checking and savings accounts with rewards based on usage or account balance.
- Passive short-term investment for incremental returns.
Money Market Accounts:
- Similar to checking and savings accounts, with potentially higher interest rates.
- Low-risk and FDIC-insured, providing a conservative investment option.
Cash Back Credit Cards:
- Credit cards offering cash-back rewards for various types of spending.
- Passive investment by earning cash back on regular purchases.
Stocks as Short-Term Investments:
- Risky short-term investment option with the potential for significant returns.
- Requires careful analysis and potentially expert advice.
- Emphasizes the importance of understanding the associated risks.
- Short-term investing can be complex; financial advisors can assist in creating a tailored financial plan.
- Asset allocation is crucial, and tools like SmartAsset’s asset allocation calculator can aid in decision-making.
- Short-term investments are useful for generating wealth quickly, especially for specific goals.
- Risk and reward should be carefully considered when making short-term investment decisions.
- SmartAsset's free tool matches investors with vetted financial advisors, aiding in decision-making.
In conclusion, the article provides a comprehensive overview of various short-term investment options, emphasizing the importance of balancing risk and reward in building a well-rounded investment portfolio.