While many investments are made for long term growth, there are occasions when you need money for short term expenses (i.e. a down payment on a house). When reviewing potential short-term investments this is what I look for:
- Stability – Small historical risk of losing money. I review previous drawdowns during volatile periods in the market, stocks typically do not fall in this category.
- Liquidity – How quick can you access this money when you need it. Something like real estate would not work here.
- Yield – This is the income or return you get on your investment or principal. It is normally expressed annually as a percentage.
Back in the ‘90s you could earn around 5% on a savings account held at your bank (See chart below). Recently, the Federal Reserve has kept short term interest rates near 0%, while some European countries rates are negative! That means you would have to pay the bank to hold your money.
To get any return today, you would have to accept more risk than in the past or settle for a low interest rates. Below will cover some of the best short-term investments you may want to consider. These may be a good option for people who will need to use their money in 2 years or less.
Types of Short-Term Investments
Interest rates are subject to change. These figures are as of September 2021.
Potential interest rate: 0.05% or less
When you get paid, your money most likely goes into your checking or savings account. Checking accounts are great for everyday spending, as you can withdrawal funds for bills, groceries, etc., whenever you please. The downside is if you have one of these accounts at a major bank they pay little to no interest.
If you already have a sufficient emergency fund in these accounts, you may want to consider one of the options below. Doing so could earn you more interest each month.
High Yield Savings Account
Potential interest rate: 0.40% – 0.50%
If you are looking for a risk-free way to earn interest on your money, a high yield savings account might be the choice for you. They are relatively easy to set up and offer quick access to your money. The rates are not locked in and can be lowered or raised depending on how interest rates move.
Certificate of Deposit
Potential interest rate: 0.55% – 0.80%
CDs are typically offered by a bank. You are paid a guaranteed rate of return for a specific length of time no matter what interest rates do. The current rates for CDS are: 6 month 0.55%, 1 year 0.70%, and 2 year 0.80% (Source bankrate.com).
Potential interest rate: 0.35% – 0.55%
A money market account is a type of savings account that often requires a minimum deposit and normally has a higher interest rate than a traditional savings or checking account. The rates of these account are comparable to high yield savings accounts. The benefit of a money market is some come with a debit card or checks.
Short Term Bonds
Potential interest rate: 1%-2%
A bond is a loan to a company or the government that pays back a fixed rate of return. A bond is safer than stocks for short-term saving. You can purchase a fund with multiple bonds, such as corporate, municipal, or government bonds. These are similar to investing in a mutual fund or ETF (Exchange Traded Fund) but instead of owning a pool of stocks, you own bonds.
Bonds can decrease in value, but their drawdowns are normally not as severe as stocks. To reduce your risk, invest in shorter duration bonds and/or government bonds.
Every dollar needs a home and money outside your emergency fund may be better invested elsewhere. If you have a large sum in your bank account, you may be losing money due to inflation. The examples listed above are all viable options for short term investments.
Disclaimers and Sources:
Income earned on $100,000 in a savings account: JP Morgan Guide to Retirement
High Yield Savings, CDs and money market rates from BankRate.com
Short term bond funds rates from YCharts.com
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Past performance is no guarantee of future results.
CDs are FDIC insured to specific limits and offer a fixed rate of return if held to maturity, whereas investing in securities is subject to market risk including loss of principal.
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.