Best Short-Term Investments
Personal finance advice tends to skew heavily towards long-term investing. Saving for retirement, stashing money away for a down payment on a house, building wealth, creating income streams, etc.
With the spotlight on long term investments, many forget that you can invest during the short-term to earn some extra cash.
Short-term investments are excellent tools for when you want to remain relatively liquid without losing your money to inflation.
What Is Considered Short-Term?
The definition of a short-term investment changes depending on the perspective. From an accounting standpoint, it’s quite defined: a debt or equity security intended to be cashed out within 3 to 12 months.
The IRS also gets down to the numbers: buying and then selling an investment within 12 months qualifies as a short-term capital gain/loss. Any longer and it falls under the more favorably taxed long-term capital gain/loss.
But we don’t need to get THAT specific. 12 months is a good max time frame for short-term investments, but your goals don’t suddenly shift to long term just because you held an investment for 13 months instead.
So if hard numbers aren’t sufficient to define short-term investments, is there another way to differentiate them from long-term investments?
Well, both short- and long-term investments are used to protect your capital against inflation and other hazards to your funds. So we can’t say that investments that defend against inflation are short-term.
Both types of investments can also be liquid; however, long-term investments are concerned with building wealth, meaning you’re meant to constantly build them up without drawing on them until retirement.
Short-term investments aren’t designed with long-term wealth-building in mind; they provide greater liquidity to your investment so you can bail out if you need the money back.
So there you go: for our purposes, a short-term investment protects your capital against inflation while still providing a fair degree of liquidity.
Short-Term Investment Risks
Short-term investments fill an important gap that long-term investments can’t, but they aren’t without risks.
Short-term investing will cost you a lot in expenses. First of all, you’ll be charged higher brokerage commission fees. In addition, if you’re a speculator (buying and selling purely for short-term profit) you’ll incur more transaction fees for all those trades.
As we mentioned earlier, gains and losses on the sale of short-term investments (by the IRS’s definition of under 12 months) are taxed at a higher rate than gains and losses on the sale of long-term investments.
Short-term capital gains are taxed at the same rate as your tax bracket’s normal income rate. Long-term capital gains are taxed at 0%, 15%, or 20% depending on your tax bracket, meaning you’ll almost always save on your tax bill when you sell long-term investments.
Also, barring a few types of short-term investments (like savings accounts), you’ll incur more “taxable events” by constantly selling investment. For example, if you buy and sell stock 5 times, that’s 5 taxable events. This won’t necessarily affect the tax you owe, but you’ll have to track more transactions to be ready for tax season.
This was probably done as yet another nudge by the government to encourage long-term wealth-building over immediate gratification. If you want to figure out a way to lower your tax burden, make sure to check out this article here.
Profits And Time
It’s not as easy to earn profits in the short-term as it is long-term. It takes more planning and analysis, and you could even lose out on profits if you pull your money too early.
Even in better scenarios, you might not have enough time to make a substantial profit anyways. Long-term investments, while not guaranteed, are more likely to provide a gain on your investment over time.
Of course, that means you have to wait years before reaping the fruits of your labor.
1. High-Interest Savings Accounts
Many hear “savings” and immediately think long-term. After all, you keep money in your savings account for the long term, right?
That’s true, but you can access your savings at any time, thus making it a liquid investment, thus making your savings account a short term investment. Now, you never withdraw all your funds like you do with many other short-term investments, making savings account slightly different than other short-term investments. You’ll always have something in your account unless you close it.
But of course, not any savings account will do. You want a high-interest online savings account. These special types of savings accounts offer rates that actually keep up with and sometimes even beat inflation, unlike your traditional bank’s pitiful 0.09% APY.
When your money’s stored away, it’s slowly but steadily growing. However, you can draw on those funds whenever you need them.
2. Certificates Of Deposit (CDs)
Certificates of Deposit (CDs) are good investments for both long-term and short-term investing, especially if you have some extra money you don’t need right away.
They’re bank investment products that pay more interest than savings accounts, but restrict your from your money for a specified amount of time. You get your money back on the maturity date, aka when the CD “ends”. Alternatively, you can pay a large penalty to get your money back early, but this penalty effectively negates any interest earnings, losing you time AND money.
CDs aren’t as liquid as other short-term investments, but they’re versatile since you can customize the term length to your liking.
One method of maximizing your short-term CD investing potential is called CD laddering.
In CD laddering, you purchase several CDs of increasing yet equidistant time periods so that you have a CD coming due on a regular basis, yet the interest rate increases each time. Each year, you buy a new CD of the longest time frame in your ladder. By the end of the first “ladder”, you’ll be earning long-term rates in short-term time frames.
For example, you could buy
- 1-year CD
- 2-year CD
- 3-year CD
- 4-year CD
- 5-year CD
Each year, buy another 5-year CD. In 5 years, you’ll have a “short-term” investment come due each year at a long-term rate.
3. Money Market Accounts
Money market accounts are a hybrid of your standard checking and savings accounts. The best ones pay interest rates on par with high savings accounts, yet you also have the ability to write checks and you sometimes even get an ATM card.
You’re still limited to 6 transfers/withdrawals out of your money market account each month, but the ability to withdraw on funds like its a checking account gives it an edge over savings accounts in the liquidity department.
In terms of short-term investing, they really aren’t much different than savings account aside from the increased liquidity. However, they tend to require a much higher minimum balance than savings accounts. Money market accounts are therefore best for short-term investors with a little more money to play around with.
Bonds are usually thought of as a long-term investment. You know, wait 10 years and you can cash them back in for a small gain that’s nearly guaranteed.
Did you know that bonds are excellent short-term investments too? They’re relatively safe compared to other short-term investments.
There are 3 types of short-term bonds:
- Government bonds
- The safest (backed by full faith and credit of US government), but pay the lowest interest rate
- Municipal bonds
- Interest earnings are exempt from federal income tax, effectively making your take-home earnings higher than government bonds, yet rates aren’t as high as corporate bonds
- Corporate bonds
- Pays the most interest, but also the riskiest type of short-term bond
To buy government bonds, pay a visit to TreasuryDirect.gov. You can buy them directly from the government on that site.
As for municipal and corporate bonds, you can do that through a broker, just like if you were buying stock.
5. Paying Off High-Interest Debt
There are two kinds of debt: “bad debt”, aka debt that doesn’t earn you anything of value; and “good debt”, aka debt that DOES provide something of value in return.
The highest-interest debt tends to be “bad debt”, aka debt that doesn’t earn you anything of value. This includes things like credit card debt and payday loans. Paying these off debts can be one of the easiest short term investments and saves you from more headache later on.
Good debt sometimes has a lower interest rate: things like mortgages, some auto loans, student loans, etc. You can actually think of this debt as an investment, too. By taking out a mortgage, you can buy a house (an appreciable asset). By getting student loans, you can invest in your skills and knowledge through education.
High-interest/bad debt is one of the biggest drains on your money. So much so that paying this debt off is essentially like an investment.
In fact, think of debt like a negative asset. Rather than collecting interest and growing your wealth, you’re paying interest and losing wealth.
When you reduce the amount of something negative, you’re increasing the amount of something positive. Therefore, by decreasing this “negative asset”, you’re increasing your total amount of assets.
After all, debt IS basically a negative investment. Your net worth is made up of both assets and debt; assets directly increase your net worth, while debt directly decreases your net worth.
6. P2P Lending
Informal lending of money between individuals has been around for ages, but technological advancements have helped P2P lending platforms explode in popularity in recent years.
P2P lending can earn your a nice return, but keep in mind the risks of lending your money out to somebody else. They might fail to pay you, interest rates might rise, and heck, maybe something goes wrong with the P2P platform and you lose your funds. P2P lending investments are not FDIC-insured, so good luck getting your money back.
But if you’re willing to assume those risks, P2P loans can earn you good money in the short-term.
7. Promotional Deals/Sales/Events For Items You Would’ve Bought Anyways
If you’re willing to stretch the definition of investment just slightly, then you could consider sales/deals/promotional events for items you’d buy anyways as short-term investments. You’re grabbing the same item for less, giving you the same amount of utility for less money. You can then use that extra money for something else.
8. Cashback Sites
Cashback sites like Rakuten/eBates/Ibotta exist solely to pay you back for shopping through their site. Many of them (Rakuten/eBates/Ibotta included) are essentially giant affiliate sites that pass some of their affiliate commissions back to you as cashback.
We’d strongly suggest signing up for one of these sites (if you’re fine with handing them some of your data), as they’ll track your purchases automatically and pay you on a regular schedule just for shopping through their site. No extra effort required; the cashback site will take you directly to the website you want to purchase from (such as Amazon) and record if you made a purchase. One of of our favorites from this list is Ibotta which is very easy to use. You can read our Ibotta review here.
Most cashback sites have in-store offers too. Next time you need to buy anything, spend 5 minutes checking one of these sites for deals. That 5 minutes could earn you a couple extra bucks each time you shop.
Long-Term Mindset, Short-Term Investing
People invest money for all sorts of reasons. But no matter who you are, a long-term mindset is essential to building wealth over time so you can feel secure come retirement.
That doesn’t mean you should ignore short-term investments. When done right, short-term investing can net you a lot of extra cash that can then be reinvested, effectively compounding your investment earnings.
As any personal finance expert will tell you, the best solution is to diversify. Have your overall long-term goal in mind, then work backwards to determine what investments you must make to get there. A financial advisor is incredibly useful here.