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.
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 until a 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.
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.
The Bottom Line
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. Finding a financial advisor to help you work through all of the issues is a good idea. SmartAsset’s free financial advisor matching service makes it easier to find a financial advisor who suits your needs. You answer a few questions. Then, we match you with up to three advisors in your area, all fully vetted and free of disclosures. You talk to each advisor and then make a decision about how you want to proceed in planning your financial future.
- 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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