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Building wealth is a multifaceted journey that requires balancing different financial goals at the same time. For example, you might be investing for retirement, saving for a new kitchen, and saving for college in a 529 savings plan at the same time.
Fortunately, there’s nothing wrong with saving to achieve different goals in your life. In fact, doing so is the best way to ensure you achieve all of your goals first. You just need to use different methods for different savings goals and make sure you use the right investments when making short-term investments so you don’t put money at risk that you might need soon.
Short-term investing is designed to help you grow your money in a short period of time without risking losing your principal. These types of investments are usually for large amounts of money that you will need to use over the next month or year. In some cases, short-term investments may be used for a longer period of time, such as five years, but your timeline may vary.
When it comes to short-term investing, most people look for options with the following attributes:
- Good liquidity, which means you have easy and fast access to your funds when you need them
- Stability, which means you are unlikely to lose any part of your initial investment
- Low transaction costs help you retain more revenue
When you choose short-term investments, you usually have to accept lower investment returns. This is because short-term investing requires a lower level of risk in order to be relatively certain that you will not lose your principal. The downside of this strategy is that you won’t be able to increase your wealth as fast.
But you’ll sleep better at night knowing that your short-term investments are less likely to lose money. This part is important if you’re saving to buy a house or invest in an emergency fund. You may need to use the money in the near future, and you don’t want to lose some of it in the meantime.
The best short-term investments for 2023 can help keep your money safe when you need it. However, some people take more risk than others in exchange for a higher potential return. Let’s look at the details of the most common short-term investment options.
advantage
- An interest-bearing account that allows you to grow your savings
- Many online savings accounts charge no fees
- Liquidity makes it easy to cash out your investment quickly
shortcoming
- low return on investment
If you want to earn interest on your savings for the next few months or years, and don’t want to risk losing any of your principal, consider online savings from companies like Citigroup, CIT Bank, American Express, and Goldman Sachs’ Marcus. saving account. For example, the Capital One 360 Performance Savings account has no minimum balance and no monthly fees.
Returns on high-yield savings accounts have improved significantly in the last year as interest rates have risen, and online savings accounts offer FDIC insurance, which means your money is protected. Not only that, but online savings accounts are easy to set up in the comfort of your home and are highly liquid, so you can access your cash easily without going through any hassle.
advantage
- An interest-bearing account that allows you to grow your savings
- Many money market accounts charge no fees
- Money market accounts come with FDIC insurance
- Liquidity makes it easy to cash out your investment quickly
shortcoming
- return on investment may be low
Money market accounts work similarly to high-yield savings accounts, but they typically offer slightly higher investment returns and higher starting investment amounts. Money market funds are also highly liquid, so you can get your money back when you need it, for whatever reason.
Remember, a money market account is different from a money market mutual fund. The latter invest in short-term securities such as Treasury bills, municipal and corporate debt, and bank debt securities. This means you have the potential to earn higher returns, but you will also pay an expense ratio.Also, it’s worth noting that, unlike money market accounts, money market mutual funds are no FDIC insured.
advantage
- An interest-bearing account that allows you to grow your savings
- low transaction fees
- Comes with FDIC insurance
- Good liquidity, which means you can withdraw funds, but quick withdrawals can be a disadvantage
shortcoming
- early exit penalty
Both traditional and online banks offer certificates of deposit (CDs), which allow you to earn higher returns on your investment than traditional savings accounts. However, CDs do require you to lock up your funds for a specific period of time—usually anywhere from three months to five or ten years.
Either way, the bank pays interest on your CD funds periodically, and you receive your initial investment plus any interest you’ve earned at the end of the term. You can also access your CD funds early if you want, but keep in mind that you will be fined if you do.
advantage
- An interest-bearing account that allows you to grow your savings
- Many money management accounts charge no fees
- Comes with FDIC insurance
- Liquidity makes it easy to cash out your investment quickly
shortcoming
- Typically offer lower investment returns than high-yield savings accounts
Cash management accounts are offered through robo-advisors such as SoFi, Wealthfront and Betterment. For example, with a SoFi Money account, you can earn higher returns on your investments than traditional savings accounts, and you can withdraw money for free at over 55,000 ATMs. SoFi Money also has no monthly fees, overdraft fees, and minimum balance fees.
Some cash management accounts even offer a welcome bonus when you make a deposit and keep it in the account for a minimum amount of time.
advantage
- Get great returns on your savings
- Minimum spend $25 to $50
- Tax incentives
shortcoming
- Need to deposit your money for at least one year
- Up to $10,000 in purchases per person per calendar year
- Fines cashed five years ago
Individuals may invest up to $10,000 per calendar year in Series I savings bonds issued by the US Treasury. I-Bonds have an impressive current return of 6.89% as of January 2023, and individuals can cash out their accounts anytime between one year and 30 years. Cashing out these bond funds five years ago, however, resulted in a penalty of three months’ interest. So, for example, if you hold your I-Bonds for 24 months, you will get your principal back plus 21 months of investment returns.
I-Bonds earn interest every month, and the interest is compounded semi-annually. Also note that I-Bonds are taxed at the federal level, but you generally don’t have to pay state or local taxes on these investment returns.
advantage
- Potential for higher ROI
- Tax Benefits in Retirement
- Access your contributions for free anytime
shortcoming
- profits are not guaranteed
- You can lose money depending on the investments you choose
- Low annual contribution limit
- While contributions can be withdrawn at any time, in most cases income can only be withdrawn without penalty after age 59½.
While a Roth IRA was originally conceived as a vehicle to help people save for retirement, the fact that you can withdraw contributions at any time without penalty makes it a good choice for short-term investing. After all, you can contribute up to $6,000 of after-tax money to a Roth IRA as long as your income is low enough. From there, the money grows tax-free until you turn 59 1/2 years old, at which point you can make distributions without paying any income tax, as long as you’ve opened the account for at least five years.
This makes Roth IRA funds ideal for those times when you’re not sure if you need the cash. If you end up in a position where you can leave your money alone, your Roth IRA contributions can continue to grow and compound until you need them in retirement.
Best of all, whether you like investing in individual stocks, mutual funds, ETFs, or index funds, a brokerage firm lets you invest in your Roth IRA funds the way you want. You can even work with a financial advisor to open a Roth IRA.
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