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If you have some extra cash and want to grow it, you need to start investing.
By investing your money, you can increase your emergency fund, save up for a house or a car downpayment, save up for that month-long road trip you’ve always wanted to take – or make early retirement possible.
There are two main investing categories to choose from – short term and long term investments.
While long term investments usually bring much better returns, not everyone wants to lose access to their money for long periods. Short term investments, on the other hand, are more liquid, meaning you can access your money at any time or within a few years.
There are quite a few different options when it comes to short term investments.
What Are The Best Short Term Investments for 2020?
The most common question I get asked when it comes to short term investing in 2020 is which option to choose? There is no simple answer to that question.
Before choosing the best short term investment option for you, consider a few factors:
- What amount do you want to invest?
- How long can you wait without accessing your cash?
- Are you willing to take risks with your investments?
Once you have all of that cleared, you can pick an option that is best for you.
Here are the best short term investment options for 2020:
Online High-Yield Savings Accounts
The more common savings accounts as offered by traditional banks will pay you just a hair more than 0% interest. By choosing an online high-yield savings account, you can get much more than that.
On average, an online bank will pay you 1.20%. One of the best online banks for savings accounts is Discover. The Discover Online Savings Account will pay you 1.70%, but do keep in mind that this is not fixed and can change over time.
Investing with Discover is easy as there is no minimum deposit and no monthly fees. You can also access your money whenever you want to. Even though the return is not as high as with some of the other options, online savings accounts are a great choice for those who are looking for a safe short term investment with access to their cash.
- FDIC insured making it a safe investment
- No minimum deposit amount
- The annual percentage yield is 1.70% with Discover
Certificates of Deposit
Certificates of Deposit (or CDs) are similar to savings accounts – but they do offer a better return, and the money is not accessible until the set amount of time has passed (unless you don’t mind a penalty).
With CIT bank, you can choose to open your CD for a term varying from 6 months to 5 years. The interest rate will be locked for the full period until your investment matures, which will depend on the term you choose. Once the time is up, you can choose to withdraw the cash or renew your CD. Certificates of Deposit are a safe and easy way to invest your money short term, even if the return is not the highest.
- Safe to invest since it is FDIC insured
- The starting amount is $1000
- The annual percentage yield is 1.85%
Money Market Accounts
Money market accounts are like a mix between savings and checking accounts. While having this type of account with a traditional bank would get you a higher return than with a checking account, you will only be able to issue a check six times a month.
Online banks offer higher APY (Annual Percentage Yield) on money market accounts, which usually depend on the minimum balance. You can get 1.50% APY with a minimum deposit of $10,000 when opening a money market account with BBVA. If the amount is lower, you will get only 0.05% APY and will be charged a $15 monthly fee. Discover money market account holders, on the other hand, benefit from 1.65% APY for balances under $100,000 and 1.70% APY for anything higher than that.
- Easy to open an account and access cash. FDIC insured
- You will need to invest and maintain larger amounts for bigger APY
- APY 1.50 – 1.70%
P2P lending is another excellent short-term investing option – and companies like Prosper help you invest in loans to companies or individuals. Prosper is one of the best platforms for P2P lending – and is one of the most popular ones. With Prosper, you can diversify your loan portfolio by investing little amounts in many different loans – and there’s also a possibility to receive monthly payments.
It is a great option for short term investing as these loans are usually set at 3 or 5 years, and the loan can be as small as $25. A slight downside is that, should you decide you need your money back early, withdrawing it would be tricky. In other words, investing with Lending Club is great if you are sure you won’t need the money for the duration of the loan.
It’s also important to remember that this type of investing can be a bit risky since it is not FDIC insured – and also, unlike bonds or CDs, the value of your P2P loan can change over time.
- Very easy to invest and diversify investments
- Possible to invest small amounts
- A great annual return of around 5.00 to 7.00+%
A Roth IRA
A Roth IRA is an individual, tax-free retirement fund with many investment possibilities (and is one of the best retirement accounts out there). The contributions can be withdrawn at any time (but not the gains). A Roth IRA can be opened with any institution approved by the IRS, with most individuals choosing to open it with brokers.
There are many investment options with Roth IRA, such as stocks, bonds, CDs, ETFs, and money market funds. There are also limits on how much you can contribute to your Roth IRA annually, and for 2020 it’s set at $6,000. Like with a traditional IRA, you can have as much control as you want over your Roth IRA (if you hold it in a self-directed account).
- Many investment options
- Withdraw at any time (contributions, not gains)
- No minimum contributions set
ETFs are exchange-traded funds that hold a mix of assets, which can include stocks, bonds, foreign currencies, and commodities such as gold. Designed for individual investors, ETFs can be a great choice for short term investments. ETFs are traded on the public stock exchange and can be bought, sold, or transferred easily. This means liquidity is high, and you can access your money whenever you need to.
ETFs can be bought and sold at any time of the day. This type of investment is often used to profit from short term price changes. It is very easy to diversify your investment portfolio with ETFs, and the fees are usually much lower when compared to other trading options.
While ETFs can be a great choice even for a beginner investor who is just starting, there is a lot to know about EFTs if you’re looking to be incredibly successful. The minimum amount you can invest can also be considerably higher than other short term investment options. If you decide to give EFTs a try, make sure you keep yourself well informed and play smart to minimize risks. Vanguard — the world’s largest mutual fund provider – is also the second-largest provider of ETFs.
- Easy to diversify your portfolio to manage risks
- High liquidity
- Average annual return between 2% – 3%
- Trading flexibility (easy to move money around)
- Lower costs
Short Term Corporate Bonds
When you are investing in short term corporate bonds, you are lending money to a company. Here, the return on your investment will be the interest the company will pay for the loan. As with any loan, do bear in mind that there is some risk involved. Having said that, with greater risks, of course, come higher returns.
Bonds are considered liquid since you can sell them. You can buy bonds through a brokerage account, which can be set up online. It is also advisable to diversify your investment to minimize the risk. Most of the time, the minimum investment amount will be $1000, but a brokerage account can have its own minimums as well.
Corporate bonds are a great short term investment for investors who have at least a little bit of experience. Before investing, make sure you do your homework to understand how it works, as well as what are the risks and fees involved.
- The potential annual return is 2.5% – 3.2% which is higher than an online savings account
- You can sell the bonds at any time to access your money
- You can invest small amounts
Short Term Gov’t Bonds – Municipal Bonds
If you choose to invest in Municipal Bonds, you are basically giving a loan to the local government. It is very similar to Corporate Bonds with the added benefit that it can be satisfying to know you are helping out your community. The loans are generally used to improve infrastructure and other parts of the neighborhood.
Gov’t Bonds are much less risky than corporate bonds since the government backs them. Municipal bonds are not taxable, unlike TIPS. This is a great choice for those who are looking to avoid paying more taxes. The interest is paid twice a year and can be a great side income.
Another great advantage is that this type of investment is liquid, and you can take your money out whenever you need it without penalty. To buy Municipal Bonds, you will need to have a brokerage account set up, which you can easily open online.
- Expected annual return 2% to 5%
- A bit of risk involved
- Access to your money through mutual funds and ETFs
- Low risk of default (U.S. bonds)
5 Year Treasury Inflation-Protected Securities (TIPS)
TIPS or Treasury Inflation-Protected Securities are government bonds, which are indexed to inflation. These bonds are more secure and less risky than corporate bonds, but the return might not be as favorable.
TIPS can be purchased directly from TreasuryDirect.gov or through a brokerage account. Bear in mind that interest on TIPS is taxable. You can also open a brokerage account online and buy TIPS ETF to save on taxes.
The dollar amount of your investment is recalculated before you receive interest every six months. Investing in TIPS can be a great way to diversify your short term investment portfolio. It might not be as dynamic and exciting as other investment options, but it is a safer one.
- Eliminates inflation risk
- Interest is paid semi-annually
- Interest is fixed, and the principle is adjusted with CPI – Consumer Price Index
Cash Management Accounts with Robo Advisors
Robo advisors make investing easy for anyone through the use of an automated platform. When signing up, you will be asked to answer some questions about your age, risk tolerance, and financial goals. The platform will then automatically generate a portfolio best fitting your preferences and needs.
It is generally significantly cheaper to invest through a Robo Advisor platform than an investment advisor. Since there is no human interaction involved, it might not be the best choice for those preferring to trust their money with a real human. On the other hand, human beings tend to be emotional and biased, while robots depend on pure logic. This can be seen as a significant advantage when investing.
Overall, Robo Advisors are gaining a lot of popularity lately. This type of investment offers relatively low risk, automated investment management, is quick, and comes in at a lower low cost. There are many platforms online using Robo Advisor services. With a little bit of research, you can easily find and pick one that suits you the best. Pay attention to reputation and any applicable fees.
- Fast and easy way to invest
- Relatively low risk
- Investment portfolio tailored to your goals and risk tolerance
- More affordable than many other investment options
- Great interest rates available
- An excellent option for new investors
Cash Back Rewards Offers
This is not really an investment, but a great way to save money short term. A lot of credit card providers offer cashback rewards when signing up for a new credit card – and there are many cashback apps worth checking out, too. You can find offers that will reward you with a cashback potential as large as $500. All you have to do is sign up and spend a minimum amount using the credit card within a set time frame.
To meet the purchasing requirement, you can spend the money where you would spend it anyway, like groceries, utilities, or gas. Some of the offers will include no fees for the first year, so you will not lose money there. Just make sure to pay off everything on time and close it once you receive the cashback to avoid annual fees.
With a bit of research and offer-shopping, this can be a great way to save money risk-free in a short period of time. Just make sure you have enough funds to pay off the credit card once you have collected the reward.
- No risk (only gain!)
- Great potential savings in just a few months
- Possible to avoid fees
- Get money for referring friends
- Cashback for online and offline shopping available
Pay Off High-Interest Debts
If you have extra cash and want to invest it in the short term, paying off your high-interest debts might be the smartest move. While it might not be an intuitive one, the return on investment can be much higher than any other option available.
Let’s say you have a credit card with $10,000 in debt with 15% interest. By paying it off, you basically get a 15% return on your investment. Not only does this allow you to get rid of the debt and get a great return, but it will also stabilize your financial situation for the future — double win.
If you don’t have enough cash to pay off your high-interest debt, you can find a credit card with lower interest or even one at 0% APR. This will speed up the payoff process and save you money. It is also a good idea to use online financial tools to manage your debts and see what cash you can save (maybe it’s time to think about debt consolidation?). These tools can show the different options you have at your disposal to pay off your debts and calculate how much you can save.
- No financial risk involved
- Very high potential return
- Helps to build a stable financial situation
What Is A Short Term Investment?
There is no specific definition of what makes an investment a short term investment. However, it is safe to say that an investment is short-term when it is for less than five years.
A short term investment usually has a smaller return on investment compared to long term investments. However, It is still possible to make a nice amount of money with short term investments as well.
Where Should I Invest My Short Term Cash?
So, as you can see, there are tons of options to invest your money short-term – and where you choose to invest it in 2020 is entirely up to you.
If you know that you might need to withdraw the money, choose an online savings account, which has quite a nice return, and access to your funds. If you know you will not need the money, CD or P2P lending might be a better choice since the return is much higher.
That said, I think P2P lending is worth a shot if you’re looking to invest short-term since it is effortless to create an account and start investing (and everything can be done without lifting yourself off the couch).
Peer-2-Peer Lenders Offer A Variety of Options
The P2P lending market is growing rapidly, and new platforms are coming out frequently. With such a variety of options, everyone can be sure to find something that suits them the best, from newbies who need a bit of guidance to the more seasoned investors.
Check out a few P2P lending platforms to find one that fits your financial goals and risk tolerance the best. Different platforms might also have different minimum investment amounts and other requirements.
As mentioned before, Propser is one of the biggest P2P lending platforms offering a few options to help you choose which loans you wish to invest in. You can also choose to invest for a couple of years, where you will receive monthly payments as borrowers pay their monthly installments.
Diversify Your Portfolio
To minimize the risk, Prosper also suggests that you split your investment over a few loans rather than one to help you diversify your portfolio. You can invest as little as $25 for each loan you choose. You can choose the loans to invest in yourself, or use their Automated Investing tool, that will invest your money by the criteria you select.
- Easy to diversify your investment portfolio
- High returns of 4-7% and more
- Receive money monthly, that you can reinvest
Whether you choose Lending Club or another P2P lending platform, make sure you check the site for the fees on transactions to avoid any surprises.
What Is A Safe Short Term Investment?
Short term investments, like any other investments, come with a risk. The risk can be low if you choose an online savings account or a money market account with an FDIC insured bank, but the returns will be significantly lower as well.
With higher returns come higher risk, so you will need to determine the amount of risk you can tolerate before choosing the right short term investment option. An easy way to minimize the risk is to diversify your investment portfolio by selecting a few different options to invest in.
Should I Invest Short-Term or Long-Term?
Short term investments can bring you a faster return and easier access to your money. It is the best choice for you if you have extra cash now and you know you will need it in the near future.
For example, if you are planning your wedding in two years, why not grow the amount you already have with a CD or P2P investment and have a bit extra for that special day?
Short term investments are also great for those just starting in the investment world and are still scared of saying goodbye to their money for a longer time. In that case, short term investing, like P2P, can be a great first step.