If you're looking to invest money for the short term, you're probably searching for a safe place to stash cash before you need to access it. Whether you're saving for a down payment on a house, a vacation, or just building up an emergency fund, you want to know that your money is secure and easily accessible. Luckily, there are several investment options that fit the bill.
Treasury bills, or T-bills, are short-term debt obligations backed by the U.S. Treasury Department, and they're a good, safe bet. They come in maturities of four, eight, 13, 26, and 52 weeks, and they're sold at a discount from their face value. When they mature, you receive the face value of the bill. Because they're backed by the government, they're considered one of the safest investments available. However, their returns are relatively low, so they may not keep up with inflation.
Certificates of deposit, or CDs, are another safe option for short-term investments. They're offered by banks and credit unions, and they come in maturities ranging from three months to five years. When you purchase a CD, you agree to leave your money in the account for the length of the term, and in exchange, you receive a fixed interest rate. The longer the term, the higher the interest rate. CDs are FDIC-insured up to $250,000 per account, so they're a safe place to keep your money. However, if you need to withdraw your money before the term is up, you may face penalties.
Money market funds are a type of mutual fund that invests in short-term debt securities, such as T-bills and commercial paper. They're designed to maintain a stable net asset value of $1 per share, so they're considered very safe. They offer a slightly higher yield than T-bills or CDs, but they're not FDIC-insured. However, they're considered very low risk, and they're a good option for those seeking liquidity and safety.
High-yield savings accounts are offered by many banks and credit unions, and they offer a higher interest rate than traditional savings accounts. They're FDIC-insured up to $250,000 per account, so they're very safe. However, their interest rates are still relatively low, and they may not keep up with inflation.
Corporate bonds are debt securities issued by corporations. They're rated by credit agencies, so you can choose bonds that fit your risk tolerance. The higher the credit rating, the lower the risk. Corporate bonds offer higher yields than T-bills or CDs, but they're not FDIC-insured. However, they're still considered relatively safe, and they offer a good option for those seeking higher yields.
Municipal bonds are issued by state and local governments to fund public projects. They're exempt from federal taxes, and sometimes state and local taxes as well. They offer a slightly lower yield than corporate bonds, but they're considered very safe. They're also rated by credit agencies, so you can choose bonds that fit your risk tolerance.
Short-term bond funds invest in a portfolio of short-term bonds. They offer higher yields than money market funds, and they're considered very safe. However, they're not FDIC-insured, and their returns may not keep up with inflation.
Dividend-paying stocks offer a higher yield than many other short-term investments. They're not as safe as T-bills or CDs, but they offer the potential for capital appreciation as well as income. Look for companies with a history of stable dividends and a strong balance sheet.
Preferred stocks are a type of stock that pays a fixed dividend. They're less volatile than common stocks, but they offer a higher yield than many other short-term investments. They're not as safe as T-bills or CDs, but they offer the potential for capital appreciation as well as income.
Real estate investment trusts, or REITs, invest in real estate and pay a dividend. They offer a higher yield than many other short-term investments, but they're not as safe as T-bills or CDs. Look for REITs with a history of stable dividends and a strong balance sheet.
Mutual funds are one of the most popular ways to invest in the stock and bond markets, especially as part of employer-sponsored 401(k) plans. Short-term bond funds and money market funds are both types of mutual funds that are designed for safety and liquidity. However, other mutual funds may be risk and less suitable for short-term investments.
If you're looking for safe havens from tough markets, these safe investments offer lower risk than stocks. However, they may not provide the highest returns. Short-term investments are designed to be quick growth and low risk, with liquid funds so it's easy to get your money back fast. Short-term investments can provide a higher interest rate than savings accounts and access to your money when you need it most. Low-risk investments offer minimal downside for upside potential. You can use low-risk investments for short-term financial goals.
Overall, the best short-term investments are those that provide safety of principal while maintaining income potential. Consider your risk tolerance, liquidity needs, and investment goals when choosing a short-term investment. By doing so, you can safely keep the cash you'll need within five years.