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When it comes to saving money, conventional wisdom says that placing your money in a federally insured bank is the best of action. These investments are safe, reliable, and accessible.
Increasingly, however, people are beginning to realize that keeping money to just sit in a bank isn’t necessarily the smartest financial move - short term investing may be.
For those interested in short term investing, here are the 12 best short-term investments:
- High yield savings account
- Money market account
- Cash management account
- Short term corporate bond funds
- Savings bonds
- Money market funds
- Certificates of deposit
- Treasury bills
- Dividend paying stocks
- Preferred stocks
- Fixed annuities
- Peer-to-Peer Loans
Finding which short term investments can be a challenging process. Read on to learn about what technically qualifies as a short term investment, and why these 12 are the best short term investments around.
1. High Yield Savings Account
High yield savings accounts are often considered a great form of investment alternative to a checking or low yield savings account. Imagine that if the entirety of your life savings were simply put in a box in the back corner of your closet.
This, metaphorically speaking, is the same thing you’re doing when you place all of your money into a checking account. Though not cold hard cash, a checking account is doing nothing to prevent dust from settling on that money.
Savings accounts, alternatively, allow you to do something with that money. When you place your funds into a savings account, the bank uses it to create loans, and you receive a small amount of interest on your return.
By keeping your money in a high yield savings account, you’re ensuring that you make a greater amount of interest on your investment than you would with a savings or checking account.
Those who keep their money in a savings account, however, do run the risk of having less purchasing power than when they invested their money due to inflation.
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2. Money Market Account
A money market account, similar to a savings account, is another kind of bank deposit in which you place your money in the specified account, and you incur interest on the money in that account.
These accounts, additionally, often qualify for federal insurance by the Federal Deposit Insurance Corporation, also known as the FDIC, making it so that it’s a generally safe investment.
Unlike most savings and checking accounts, however, money market accounts often require a higher minimum initial investment. Additionally, money market accounts face a similar risk in that their purchasing power is likely to decrease over time, as they often have a hard time keeping up with inflation, even if inflation is only at approximately 3%.
When opening a money market account, be sure to check both banks and credit unions for the best opportunities.
Minimum Deposit: $1,000
3. Cash Management Account
Cash management accounts, also known as CMAs, are another type of banking account, similar to that of a checking and savings account. Cash management accounts combine checking accounts, savings accounts, and investment accounts, putting them all within one product.
This makes it incredibly helpful for the modern banker as it reduces the number of accounts people need to navigate.
Cash management accounts also serve as a great form of investment because, similar to that of a money market account, the interest rates of cash management accounts are typically much higher than the average savings account.
Cash management accounts often produce a return of about 0.5% per year, a small amount, but significantly higher than the 0.06% return most savings accounts produce.
Cash management accounts do face the downside, however, of often having subpar customer service. When banking, it’s incredibly important the banks are accountable to the investors.
Cash management accounts often don’t offer face-to-face customer service.
4. Short Term Corporate Bond Funds
Often, people consider bonds a safe alternative to stocks. While often bonds are secured by the government and are thus considered government bonds, there are some bonds available on the market that are corporate bonds.
These are, like government bonds, an investment of a certain amount in a company that gathers interest. Once the bond matures, the corporation pays the initial investment back.
For example, if a company were to sell a bond for $10,000 to an individual that matures in five years, the company would, over those five years, pay the investor interest on the investment.
After five years, the bond would mature, the individual would no longer receive interest on the investment, and the initial $10,000 would be returned. This bond, because it matured within five years, would be considered a short term corporate bond.
5. Savings Bonds
Savings bonds operate in the same way as corporate bonds, with the exception that these are government-backed, not corporate-backed, and are thus backed by the “full faith and credit of the United States”.
This means that investors don’t need to be concerned that the investment won’t be paid back, because this would entail the United States defaulting on its debt, or the federal government collapsing.
Though not necessarily impossible, this is highly unlikely. Savings bonds, though coming with nearly no risk, also come with very little return. This means, just like savings accounts, that while the number of dollars may not be less after a short time period, the purchasing power may be less due to inflation.
Fortunately, government bonds are one of the most traded assets and are thus highly liquid.
6. Money Market Funds
Money Market Funds are another great form of short term investment. Not to be confused with a money market account, a money market fund is similar to that of a stock portfolio.
Money market funds invest in a number of short term, highly liquid assets to encourage diversity and thus decrease risk. These assets may include certificates of deposit (CDs), short term bonds, and several other short term investments.
These are very different from money market accounts. Money market accounts, as previously mentioned, are insured by the FDIC and are a separate asset.
Money market funds are investments themselves offered by investment companies. There’s no guarantee of principle, or even of return on the investment.
Money market funds do have the benefit, unlike some other short term investments, of allowing people to withdraw funds from them without any penalties.
7. Certificates of Deposit
Perhaps the most well-known type of short term investment, certificates of deposit, also referred to as CDs, are one of, if not the safest form of investment. CDs are what are called time deposits.
What this means is that you’re allowing a bank to hold onto a set amount of money for a contractually agreed amount of time. Banks look favorably upon CDs because it forces those who hold them to continue to do business with that bank.
In response, to make it beneficial to customers, CDs have an interest rate associated with them, so that those who engage in these contracts can incur a return. This makes CDs a great form of true savings.
CDs, however, do have the downside in which investors face a monetary penalty for withdrawing money from the account prior to the agreed date. This means that, if you were to run into an emergency and need money, you’d face a penalty for withdrawing funds.
8. Treasury Bills
In many ways, Treasuries are similar to US saving bonds. The US Department of Treasury offers a number of investments in the form of debt obligations.
These, just like US saving bonds, are when someone invests a certain amount that is returned after the treasury matures, collecting interest on the investment the entire time prior to it maturing.
While most US saving bonds are sold in $10,000 denominations, Treasurys are sold in denominations of $1,000. The biggest difference between Treasuries and saving bonds is the time in which the investment returns.
While most bonds take twenty to thirty years to mature, Treasuries mature at different rates depending on what they are. Treasury bills mature in a year or less, Treasury notes mature in about ten years, and Treasury Inflation-Protected Securities, known as TIPS, go up and down depending on inflation.
9. Dividend Paying Stocks
Dividend Paying Stocks offer a unique and profitable way to invest in the short term.
Dividend paying stocks are when companies distribute some of their earnings to shareholders, allowing investors to incur a return on their investment from both the changes in the stock's price, as well as paying commensurate to how the company is doing.
This is phenomenal for short term investors as it allows an additional way to make money off of their investment. Dividend paying stocks aren’t without potential downsides, however. If a company were to have bad earnings consistently, it may be forced to eliminate the dividend.
While it’s true that the value of the stock would decrease regardless of the presence of the dividend if the company was doing poorly, if the dividend was eliminated, this would drive prices down even further, causing a major loss for the investor.
10. Preferred Stocks
Preferred stocks serve as a metaphoric combination of a bond and a stock. Preferred stocks work similarly to dividend paying stocks, in the fact that companies reward shareholders with a portion of the earnings.
However, while dividend stocks often simply reinvest that dividend into additional stock holdings, preferred stocks pay out the dividend in cash.
Preferred stocks are also somewhat different from other dividend paying stocks in the fact that preferred stocks are required to receive the dividend before other common stocks.
In other words, preferred stocks are simply a more secure form of a dividend paying stock.
11. Fixed Annuities
Fixed annuities, unlike the previously mentioned investments, don’t incur any sort of return. Rather, a fixed annuity is simply a way of ensuring that you are continuing to receive payment over a certain amount of time.
Fixed annuities work by paying a certain amount upfront to a company that’ll distribute that money back to you over a certain period of time. This makes it very beneficial for those whose income may be inconsistent.
Fixed annuities have the downside of being highly illiquid, however. This means that, once the contract is agreed to, it’s incredibly difficult, if not impossible, to get out of.
Additionally, if inflation were to rise significantly during the time in which an investor is part of a fixed annuity, then the purchasing power of the investment would be greatly decreased.
Though you’ll incur the principal investment, its actual value will be decreased.
12. Peer-to-Peer Loans
Peer-to-Peer loans have, in the past, been criticized for their lack of regulation and the fact that it was a way to circumvent the banking system. Yet, with the rapid development of technology and online investment, Peer-to-Peer lending is slowly making a comeback.
Peer-to-Peer lending, also known as P2P lending, allows individuals to offer their own money as loans to others. Lenders reap the benefit of making a return on their investment in the form of interest, while lendees are able to receive a better rate than what most banks offer.
Peer-to-Peer lending most frequently occurs on websites that facilitate the exchange. Be sure to check out sites such as Prosper, Lending Club, and Peerform when deciding to invest in Peer-to-Peer Loans.
Most of the time when people discuss investing, people imagine stock portfolios such as a 401(k) or other sorts of long term investments that are held onto for ten, twenty, or even thirty years.
These are often the most substantial investments and are the investments that’ll incur the most return. Sometimes, however, people want to save money, but want it to collect more interest than what a bank can offer.
In these cases, people turn to short term investments. These are investments that can easily be converted into currency within five years. This allows time for the investor to do an effective job of saving money, but can also incur a return from the investment.
These types of investments are most often used to mitigate risk and act as an alternate form of savings. Important to note is that these investments must be highly liquid, in order to be transformed into hard currency quickly.