The Best Short-Term Investments of 2020

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Investing is a great way to build wealth. Unfortunately, while many people have the financial means to invest, they may avoid doing so due to the long-standing notion that investments are complicated, arduous, and unnecessarily risky. Although, yes, investing can sometimes be complex, there are many ways to proceed with caution. Whether you’re in your 20’s or your 50’s, it’s a good idea to start exploring different types of investing to begin preparing for your future. 

To be clear: your investments are not something to take lightly. This is your money, after all, and so making a conscious effort to understand short-term investments will help you make wise financial decisions now and in the future. 

Of course, any type of investment comes with its unique share of risk. There’s little to be done to circumvent this. And while it’s hard to be certain whether your investment path will lead you to long-term gains, there are methods more likely to yield greater returns than others. Familiarizing yourself with these can go a long way in paving the way for a bright financial future.

Short-term investments and long-term investments are two options you have when it comes to investing. Once you decide to invest, you’ll need to evaluate which of these two is the right choice for you and your unique financial goals. 

Why choose short-term investments to build wealth

There are plenty of benefits to short-term investing. From faster returns to easier access to your money, short-term investing is an attractive prospect for investors who don’t want to wait too long to see the fruits of their labor. These tangible results are why many investors flock to short-term investments over long-term options. And while short-term investments often yield lower returns than long-term investments, they are also less risky. If you are averse to risk and prefer a safe bet when it comes to your money, you may find short-term avenues much more appealing than longer-term options. 

Short-term investing is growing in popularity, and you’ve got dozens of options to choose from. But like with all important things in life, before you embark on your short-term investment journey, you’ll need to do some research. Becoming well acquainted with all different types of short-term investing options will ensure you make the right decision for your unique financial situation. 

In order to decide which method of investing makes sense for you, there are a few questions you may need to ask yourself. Getting serious about your approach toward investing will make the process of finding the right investment much easier. One question you’ll need to answer is: what are your goals for investing? 

Whether you are hoping to simply preserve your wealth or are looking to earn money on interest, solidifying your reasons for investing will help you narrow down your options and increase the chances of finding the short-term investment that’s right for you. 

Another question to ask yourself is how much money you are willing to invest. Perhaps you have a few hundred dollars to play with, or maybe you’ve amassed quite a large amount of money and are looking to make bold moves that will set you up for the future. Some short-term investing options may be better suited for larger investments, so it’s important to determine beforehand how much you can afford. By determining this beforehand, you can approach your investing with a greater purpose. 

It’s also crucial that you consider how much risk you are willing to take when it comes to your investments. There is no right or wrong answer here, and it’s important to remember that everyone’s financial situation is different. If you are new to investing, you may want to deal with as little as risk as possible. This is common in young investors. A high-yield savings account, for instance, may be a wise choice for investors looking for a safe bet that doesn’t carry much risk. 

Liquidity is another factor you’ll want to evaluate when choosing which short-term investment makes the most sense for you. Different investments have different time periods for which you can access your cash. If you aren’t comfortable not being able to see your money for months or years at a time, some methods of short-term investing may not be feasible for you. 

Being clear about all of these factors can help you make smarter choices when it comes to investing. By approaching your financial situation realistically, you’ll be able to more easily determine which short-term investment will align with your goals. 

Here are 10 popular methods of short-term investing to consider. 

High-yield savings accounts

Saving money for the future is necessary to keep afloat in the event of an emergency. This is why many people turn to savings accounts. But if your money is going to sit in one place, there’s no reason why it shouldn’t earn a little extra in the process. One of the easiest ways to invest is through the use of a high-yield savings account. 

High-yield savings accounts can do things regular savings accounts simply can’t. Available online and through brick-and-mortar institutions, many high-yield savings accounts require very little effort on the part of the investor. If you’re hoping for a means of investment that won’t require you to do much research, a high-yield savings account can be a great way to grow your nest egg with not much risk involved. Keep in mind that online high-yield savings accounts often offer better rates than their brick-and-mortar counterparts.

Another big benefit of investing in a high-yield savings account is the fact that these typically carry little to no fees, likely even in cases of non-sufficient funds. While many people, before they decide to invest, keep their money in a traditional savings account, they are leaving money on the table. You can get the most bang for your buck by comparing rates on high-yield savings accounts and opening up one as soon as you have a sufficient amount of money to wisely invest. 

Robo-advisors 

Investing apps have made quite an impact on the industry during their time. From trading apps to money-saving apps, investment apps are helping millions of users improve their financial standing and save for the future. In fact, these apps have made the process of investing so easy that even children and teens are getting in on the game. This means that a growing number of young adults are entering their careers with prior knowledge of stocks and other investment methods. 

Another popular type of digital investing platform is called the robo-advisor. Robo-advisors are a popular method with passive investors because they handle the bulk of the work for you. They are also relatively inexpensive and typically don’t require a high account balance to start. But while there are plenty of benefits to enlisting the help of a robo-advisor, that’s not to say they are without drawbacks. You’ll need to research carefully before committing to any robo-investor. 

Robo-advisors are a passive means of investing, but they do require some time and effort, to start. First, you’ll answer questions about your age, assets, and preferred level of risk. This will help your robo-advisor generate a profile and create a portfolio based on your unique needs. 

Researching the different types of robo-advisors available and how they operate will go a long way in choosing the right platform for you. There are several factors that can make or break a robo-advisor. Keep in mind things like fees and ease-of-use when deciding which of the many investment apps can serve you best. Other things a trusted robo-advisor should have include account services, goal planning portfolio management, and reliable security features. You should also be on the lookout for educational resources if you are hoping to learn more about investing. A robo-advisor that offers robust learning tools can help you hone your knowledge of investing and pave the way for more active trading in the future. 

Peer-to-peer loans

Maybe you want to try a less traditional method of investing that goes beyond savings accounts. In this case, peer-to-peer lending can be a great place to start. With peer-to-peer lending, you’ll invest in loans for as little as $25, which can be borrowed by users to fund debt consolidation, balance transfers, and even home improvements. Lending to strangers can seem intimidating, but there are platforms to help you invest in peer-to-peer loans confidently, such as Lending Club and Prosper, among others. These have made this type of investing easier than ever before. 

Peer-to-peer lending does more than benefit the borrower. One of the biggest benefits investors see with peer-to-peer lending are the high annual returns they yield. With peer-to-peer lending, you can expect to yield an annual return of between 5.00 and 7.00+%. 

Although peer-to-peer lending is beneficial for both borrowers and lenders, there are still a few negatives associated with this type of investing. Once you decide to invest in peer-to-peer loans, it may be a while before you are able to withdraw your money. This may not be the best route if you are hoping for immediate access to your cash or have plans for the near future. It can, however, be a great option if you don’t need to withdraw before the duration of the loan is up. 

Roth IRAs

If you’ve got plans for retirement one day, chances are good that you’ve heard of the Roth IRA. This tax-free retirement fund is one of your best choices for retirement and is helping millions prepare for their futures. 

While many people save for retirement through a 401(k), which is often matched by their employer, others, such as business owners and contractors, may turn to Roth IRA for saving. With a Roth IRA, you have investment options like stocks, bonds, ETFs, CDs, and even money market funds. And while you can withdraw your contributions at any time, you can not withdraw your gains. Doing so risks a penalty. This may be one of the few downsides to this type of investment.

There are also limits to what you can contribute to your Roth IRA. These can change yearly. Currently, the maximum contribution is $6,000 annually. If you are worried about saving for the future, investing in a Roth IRA may be the right investing method for you. A financial advisor can help walk you through the process of setting up a Roth IRA. 

Certificates of Deposit (CDs)

Many people on the fence about investing will first experiment with savings accounts before other high-risker ventures. This approach makes a lot of sense. Certificates of Deposit (CDs) are another good option that is suitable for all kinds of investors. 

There are several reasons why CDs are a popular method of investing. These often yield better returns than savings accounts, with interest rates locked for the duration of your term. Terms can vary from 6 months to 5 years, depending on the bank. While you can’t withdraw your money until your term is over, unless you pay a penalty, CDs are still a good option for a decent return. Some CDs can carry an APY as high as .50%. You can also choose to extend your term once it has expired. Don’t hesitate to consider a CD if you won’t need to see your money for a while. The longer your CD stays intact, the higher the interest rate will be. 

High-interest debts 

Carrying a high amount of debt around can be stressful, especially if you are in an already tough financial position. If you are carrying thousands of dollars in debt with no end in sight, you may be wondering what you can do to lessen the burden. The good news is that you save money on interest by approaching your debt with strategy. 

While not investing, per se, paying off your high-interest debts is just one way to put your extra money to good use. And there are big benefits to doing this, too. Paying off your debt is low-risk because it is a certainty that you will save money in the long run by doing this. For example, say you owe $20,000 in credit card debt at an average interest rate of 15%. By paying off this debt early, you can save thousands of dollars. Not only will you have paid down your debt, but you will also have gotten a great return on your investment. 

Not to mention, paying off your highest debts early may also cause your credit score to increase significantly, which carries its own long list of benefits. With a higher credit score, you can secure lower interest rates on loans and enjoy higher credit limits. Paying off high-interest debt with your extra cash is both financially responsible and a wise move toward strengthening your financial future. 

Or maybe you’re looking for another way to see tangible gains even sooner than the typical short-term investment. If so, you may want to consider your options when it comes to cash back rewards. 

Many credit cards offer cash back rewards for new and old members, and they can be a major perk to consider when shopping around for a new account. Cash back rewards are an awesome option because they allow you to earn money on purchases you would have likely made anyway. Things like gas, groceries, and other items may be covered by your cash back rewards. By paying your bill on time each month, you’ll minimize fees and see real gains. 

Another perk of cash back rewards is that you can refer friends to see additional savings. This is one of the more fun ways to invest short-term. 

Corporate bonds

Investing in an IOU may seem far from legitimate. But on the contrary, corporate bonds remain a sensible short-term investment for a wide range of investors.

Purchasing corporate bonds is essentially lending money to corporations. Once the principle matures, you’ll get your money back, plus interest. This makes corporate bonds a worthy investment for those looking for minimal risk. Safer than stocks, corporations are legally obligated to repay bonds, even if they face a financial decline. 

While safer than other forms of investing, corporate bonds do still carry risk. A corporation’s credit-worthiness, for instance, should be a factor when considering corporate bonds.    

Municipal bonds

Municipal bonds, also known as government bonds, are another great option for short-term investments. Some bond investors may find municipal bonds beneficial for preserving their wealth, rather than increasing it. But it is a low-risk option, nonetheless. Similar to corporate bonds, municipal bonds are debt securities used to support government funding for things like libraries, parks, roads and bridges, as well as other kinds of infrastructure. These usually carry semi-annual interest payments, which are exempt from federal income tax. 

Treasury securities offer another wise form of short-term investing. These are bonds that are issued by the government’s U.S. Treasury, and there is a range of treasury products to choose from. Treasury inflation-protected securities (TIPS) are among the most popular options. Treasury inflation-protected securities are securities indexed to inflation. The underlying value of these rise with inflation. Deflation, however, won’t negatively affect your investment, as you will receive either the adjusted amount or your original investment one the security matures. 

Exchange-traded funds

Exchange-traded funds, or ETFs, are baskets of securities investors can buy or sell via a stock exchange or brokerage firm. Investing in ETFs carries many benefits. ETFs are easy to trade, meaning you can buy and sell during any time of day. Many are also indexed based, which are required to publish their holdings each day, offering investors a great deal of transparency. Also, ETFs are more tax efficient, as they typically generate lower levels of capital gain compared to say, mutual funds. 

There is also a large variety of ETFs for investors to choose from. Some of these include Commodity ETFs, Bond ETFs, and Inverse ETFs, which allow investors to profit from underlying market or index decline. 

Cash management accounts

Cash management accounts, typically offered by brokerage firms, are convenient for short-term investing. A cash management account offers several benefits for investors. Usually offered by institutions other than banks or credit unions, cash management accounts are can be used in place of your traditional checking account. There are benefits to going this route.

Enrolling in a cash management account can help you streamline your finances by making transactions, using credit, and earning interest all in one account. Cash management accounts also carry higher annual percentage rates than traditional banks. Betterment Cash Reserve, for example, carries a .40% APY while traditional banks can offer APYs as low as .01%. 

Cash management accounts often come with a debit card, a checkbook, and online billing. Other things you’ll find with a cash management account may include goal setting, money transfers, and overdraft programs, to name a few. If you are hoping to invest money while simplifying your banking, a cash management account is a good way to go, but be warned: Before you open an account like this, it’s important to have all the info. From monthly fees to minimum balance requirements, knowing the ins and outs of a cash management account is crucial before signing up.

Final word

Short-term investments are a solid way to gradually increase your wealth with little risk. Whether you’re hoping to save money for decades down the line or make some profits in the short term, clarifying your goals and reasons for investing will make sure you make the right decisions when it comes to where your money will go. 

While there are some drawbacks to short-term investments, as there are with most forms of investing, you can still use these to set yourself up for a brighter financial future. Before deciding on which short-term investment route to take, be sure to do your research. Failing to weigh the pros and cons of each method will put you at a disadvantage. By carefully evaluating your options, you’ll have a greater chance of seeing real gains with the potential to brighten your financial future. 

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